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ECONOMIC    ESSAYS 


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ECONOMIC    ESSAYS 


BY 

CHARLES    FRANKLIN    DUNBAR 

LATE  PROFESSOR  OF  POLITICAL   ECONOMY   IN    HARVARD   UNIVERSITY 


EDITED    BY 

O.   M.   W.   SPRAGUE 

ASSISTANT  PROFESSOR  OF   ECONOMICS   IN   HARVARD   UNIVERSITY 


SEitij  an  Entrotiuctton 

BY 

F.    W.   TAUSSIG 

HENRY  LEE  PROFESSOR   OF   ECONOMICS    IN    HARVARD   UNIVERSITY 


THE    MACMILLAN    COMPANY 

LONDON:   MACMILLAN  &  CO.,  LTD. 
1904 

All  rights  reserved 


Copyright,  1904, 

By  the  macmillan  company. 


Set  up  and  electrotyped.      Published  November,  1904. 


Norivood  Press 

J.  .<?.  Cashing  &  Co.  —  Berwick  &  Smith  Co. 

Nurivood,  Mass.,  U.S.A. 


CONTENTS 

PAGE 

Introduction ,        .        .  vii 

I.  Economic  Science  in  America,  1776-1876      .        .        .        .  i 

II.    The  Reaction  in  Political  Economy 30 

III.  The  Academic  Study  of  Political  Economy       ...  52 

IV.  RiCARDO's  Use  of  Facts 68 

V.  Some  Precedents  Followed  by  Alexander  Hamilton       .  71 

VI.    The  Direct  Tax  of  i  861 94 

VII.    The  New  Income  Tax 116 

VIII.     Early  Banking  Schemes  in  England 135 

IX.    The  Bank  of  Venice 143 

X.  Accounts  of  the  First  Bank  of  the  United  States         .  168 

XI.     Deposits  as  Currency 172 

XII.    The  Bank-note  Question 188 

XIII.  The  Safety  of  the  Legal  Tender  Paper   ....  207 

XIV.  The  National  Banking  System 227 

XV.     Can  we  keep  a  Gold  Currency  ? 248 

XVI.    The  Crisis  of  1857 266 

XVII.     The  Crisis  of  i860 294 

XVIII.     State  Banks  in  i860 314 

».'  XIX.  The  Establishment  of  the  National  Banking  System      .  330 

XX.  The  Circulation  of  the  National  Banks,  1865-1900          .  346 

Index 365 


INTRODUCTION 

Charles  Franklin  Dunbar  was  born  at  Abington,  Massachu- 
setts, July  28,  1830,  and  died  at  Cambridge,  Massachusetts,  Janu- 
ary 29,  1900.  For  nearly  thirty  years,  from  1871  until  his  death, 
he  was  Professor  of  Political  Economy  in  Harvard  University  ;  and 
it  was  during  this  period  that  he  prepared  the  essays  printed  in 
the  present  volume. 

Professor  Dunbar  did  not  enter  on  his  academic  career,  how- 
ever, until  he  had  passed  the  age  of  forty.  The  best  years  of  his 
early  manhood  were  given  to  work  of  a  very  different  sort.  For 
ten  years  he  was  editor  of  a  daily  newspaper ;  a  phase  of  his  life 
little  known  to  those  who  afterwards  felt  his  influence  as  teacher 
and  author,  but  one  in  which  his  success  was  no  less  marked. 

After  graduating  from  Harvard  College,  in  185 1,  he  engaged 
for  a  short  time  in  business ;  health  failing,  spent  a  year  at  farm- 
ing ;  then  entered  on  the  study  of  the  law,  and  was  admitted  to 
the  bar  in  1858.  Meanwhile,  contributions  from  his  pen  had 
appeared  in  the  Boston  Daily  Advertiser.  In  1859  he  became 
part  owner  and  associate  editor  of  that  newspaper,  and  soon  was 
sole  responsible  editor.  From  1859  to  1869  all  his  energies  were 
given  to  its  editorial  and  business  management. 

These  ten  years  witnessed  the  most  perilous  and  momentous 
events  in  the  country's  history.  The  times  were  trying  for  all 
men,  and  not  least  so  for  a  high-minded  man  in  charge  of  an  im- 
portant daily  newspaper.  Rapid  decisions  were  called  for  on 
great  questions ;  news  of  vital  concern  had  to  be  gathered,  sifted, 
presented ;  the  conflicting  tides  of  opinion  in  the  community  had 
to  be  at  once  followed  and  guided.  The  Advertiser,  as  conducted 
by  Professor  Dunbar,  was  a  model  newspaper,  and  deserved  its 
position  as  the  most  influential  journal  in  New  England,  It  stood 
stoutly  for  the  cause  of  the  North,  and  never  abated  its  unfaltering 
faith  in  the  justice  of  that  cause  and  in  its  ultimate  triumph.    Its 


viii  INTRODUCTION 

support  of  President  Lincoln  and  his  associates  was  firm,  yet  not 
slavish.  Professor  Dunbar  was  by  nature  conservative  and  judi- 
cial, and  both  sides  of  a  disputed  question  presented  themselves  to 
his  mind.  It  is  probable  that  on  many  of  the  measures  re- 
sorted to  during  and  after  the  Civil  War  he  had  his  own  doubts 
and  reservations.  But  those  were  times  for  united  action,  and 
such  the  Advertiser  stood  for.  Its  editorials,  written  without 
exception  by  him,  show  a  warmth  and  exaltation  of  spirit  very 
different  from  the  measured  tone  of  the  scientific  papers  printed 
in  the  present  volume.  And  thus  they  show  an  aspect  of  the 
man  not  so  conspicuous  to  the  reader  of  these  sober  and  judicial 
writings  :  a  capacity  for  great  enthusiasm  and  a  fervid  love  of  the 
right. 

The  conduct  of  a  daily  newspaper,  however  far-reaching  it 
may  be  in  its  influence  on  public  affairs,  rarely  gives  rise  to  con- 
tributions of  permanent  value  to  science  or  literature.  To  this 
rule  Professor  Dunbar's  editorial  career  offers  no  exception.  No 
one  would  have  been  more  averse  than  he  to  a  reprint  of  selections 
from  his  writings  in  the  Advertiser.  Yet  in  another  sense  these 
writings  have  a  permanent  value  of  the  highest  sort.  Here  is  a 
record  from  day  to  day  of  the  history  of  the  United  States  during 
its  most  dramatic  and  trying  decade  —  a  record  prepared  or  super- 
vised by  a  man  of  great  sagacity,  of  unswerving  patriotic  spirit,  of 
scrupulous  truthfulness,  and  of  high  skill  in  exposition.  To  the 
friends  and  associates  of  Professor  Dunbar,  his  editorials  still  have 
a  value,  in  that  they  show  the  intellectual  and  moral  qualities  of  the 
man.  To  the  future  historian,  wishing  to  come  close  to  the  march 
of  events  when  our  own  still  vivid  recollections  of  the  Civil  War 
shall  have  faded  away,  they  will  have  a  much  higher  value.  They 
reflect  in  the  mirror  of  a  clear  and  well-tempered  mind  the  im- 
pressions of  every  day's  events  in  those  ten  years  of  fierce  com- 
bat and  slow  recovery. 

The  financial  and  economic  events  of  the  period  were  of  the 
most  extraordinary  kind.  A  huge  national  debt  was  incurred  ; 
paper  money  was  issued  to  an  excess  that  caused  great  and 
sudden  depreciation  ;  a  wide-reaching  system  of  excise  taxes  was 
rapidly  created,  and  as  rapidly  swept  away ;  a  high  protective 
tariff  was  set  up,  and  unexpectedly  retained  ;  millions  of  slaves 
became  frecdmen,  and  the  entire  industrial  organization  of  the 


INTRODUCTION  ix 

South  was  revolutionized.  Professor  Dunbar's  attention  was 
necessarily  given  to  all  phases  of  the  country's  history,  but  the 
financial  and  economic  phenomena  enlisted  his  special  interest. 
He  gathered  a  fund  of  experience  such  as  few  economists  have 
been  fortunate  enough  to  possess.  He  learned  much  in  the  later 
years  of  his  scholarly  life,  and  settled  on  conclusions  and  prin- 
ciples which  were  not  accurately  defined  in  his  mind  during  his 
newspaper  career.  But  it  may  be  doubted  whether  any  research 
was  so  productive  or  any  experience  so  profitable  as  the  unremitting 
observation  and  reflection  during  these  years  of  varied  economic 
history.  Scholarly  as  his  work  was  in  later  life,  and  recondite  as 
were  some  of  his  researches,  he  never  became  a  closet  economist. 
Whether  discussing  contemporary  proposals  for  legislation  on  the 
currency,  or  the  history  of  banks  in  past  centuries,  he  kept  a 
close  view  of  the  working  of  economic  forces  in  their  concrete 
details. 

The  best  years  of  his  life  and  the  best  of  his  strength  were 
given  to  the  Advertiser.  It  is  probable  that  he  never  recovered 
completely  from  the  strain  then  endured.  In  1869  his  health 
seemed  sapped,  and  he  was  glad  to  dispose  of  his  interest  in  the 
paper  and  to  withdraw  from  its  management.  Fifteen  years  later, 
when  he  had  been  long  settled  in  his  academic  post,  he  was  sud- 
denly called  on  to  conduct  it  again,  during  a  brief  period  of  stress. 
In  1884  the  Republican  party  nominated  for  the  presidency  Mr. 
Blaine,  whom  many  independent  Republicans  could  not  conscien- 
tiously support.  The  Advertiser  had  then  come  into  the  hands  of 
friends  and  associates  of  Professor  Dunbar's.  Over  night,  a  deci- 
sion had  to  be  reached  whether  to  support  the  nomination  or  to 
bolt.  The  bolt  was  voted ;  whereupon  the  editor,  who  would  not 
abandon  Mr.  Blaine,  resigned  on  the  spot.  Professor  Dunbar  was 
asked  to  step  into  the  breach,  and  did  so  without  hesitation. 
Stanch  as  he  had  been  in  support  of  the  RepubHcan  party  during 
its  days  of  storm  and  stress,  he  was  equally  stanch  in  opposing  it 
when  it  fell  into  ways  he  thought  evil.  Immediately  after  the 
election  of  1884,  he  resumed  undivided  attention  to  academic 
duties. 

Shortly  after  his  retirement  from  the  Advertiser,  in  1869,  he 
was  asked  by  President  Eliot,  then  just  entering  on  his  career  as 
head  of  Harvard  University,  whether  he  would  accept  a  professor- 


X  INTRODUCTION 

ship  of  political  economy  in  that  institution.  He  doubted  his 
qualifications  for  the  post,  and  for  a  time  would  give  no  answer. 
He  finally  assented,  but  first  gave  two  years  to  travel  and  study 
in  Europe.  He  was  formally  appointed  to  his  professorship  in 
1 871,  and  entered  on  its  duties  in  the  fall  of  that  year. 

As  his  hesitancy  in  accepting  the  appointment  showed,  Pro- 
fessor Dunbar  was  keenly  alive  to  the  need  of  adequate  equipment 
for  his  new  duties,  and  unduly  modest  as  to  his  own  com- 
petence. At  that  time  it  would  have  been  a  rare  chance  to  find 
a  man  better  equipped.  Systematic  training  in  economics,  such 
as  is  now  offered  in  a  dozen  American  universities,  —  and  is  so 
offered,  it  may  be  added,  largely  as  a  result  of  the  growth  of 
economic  study  in  Harvard  University  under  Professor  Dunbar's 
own  guidance, — was  then  unknown  in  this  country  and  in  England, 
and  was  barely  begun  in  Germany.  Any  appointee  to  a  professor- 
ship in  the  subject  must  then  have  been  a  self-made  economist. 
There  were,  it  is  true,  not  a  few  persons,  with  more  or  less  repute 
as  writers  on  economic  topics,  on  whom,  rather  than  on  the  little- 
known  editor,  the  choice  of  the  Harvard  Corporation  might  have 
fallen.  Yet  that  choice  proved  a  singularly  fortunate  one.  Pro- 
fessor Dunbar  was  by  temperament  a  scholar,  open-minded  and 
judicial,  averse  to  the  superficial  treatment  of  any  topic,  and  with 
interests  that  looked  far  beyond  the  horizon  of  the  day.  He 
possessed,  also,  what  men  of  scholarly  bent  often  lack,  both 
executive  capacity  and  sound  judgment,  and  thus  became  an 
invaluable  coadjutor  and  counsellor  in  the  tasks  that  lay  before 
the  new  administration  of  the  University.  Not  only  was  he  the 
natural  leader  in  the  organization  of  the  instruction  which  most 
directly  concerned  him  ;  he  took  also  a  large  part  in  the  rapid 
transformation  of  the  institution  from  a  small  college  with  loosely 
attached  professional  schools  into  a  great  and  consistently  organ- 
ized university. 

P^or  many  years  after  his  appointment  Professor  Dunbar 
was  virtually  engaged  in  equipping  himself  as  a  teacher  of  eco- 
nomics. Cherishing  high  ideals  of  scholarship,  he  delved  in  the 
earlier  and  later  literature  of  his  subject.  He  became  widely  read 
in  the  classic  writers  of  England  and  France.  It  was  not  until 
a  later  period  that  he  turned  to  German  writers  also,  who  indeed 
hardly  deserved  attention  in  so  great  degree  at  the  outset  of  his 


INTRODUCTION  xi 

academic  career.  He  knew  his  Locke  and  Hume,  Quesnay  and 
Turgot,  Adam  Smith  and  Malthus  and  Ricardo  and  Mill,  not 
to  mention  Say,  Senior,  Storch,  Rossi,  Bastiat,  and  the  whole 
host  of  minor  writers.  Perhaps  he  gave  an  undue  amount  of 
time  to  some  parts  of  this  reading.  There  was  in  him  not  only 
a  strong  historical  bent,  but  a  streak  of  antiquarianism.  A  lively 
curiosity  of  this  sort  sometimes  led  him,  in  later  years  as  well  as 
during  this  formative  period,  to  follow  clews  and  unravel  minor 
tangles,  which  after  all  lay  apart  from  his  dominant  interests  and 
diverted  him  from  his  main  work. 

Not  less  characteristic  than  this  absorption  in  the  general 
literature  of  economics  was  his  complete  abstention  from  the 
discussion  of  current  questions  of  economics  and  politics.  His 
experience  as  editor  had  informed  him  of  every  detail  in  contem- 
porary history,  and  had  habituated  him  to  constant  and  prompt 
discussion  of  questions  of  the  day.  It  would  have  been  natural 
that,  as  professor,  he  should  continue  such  discussion.  He  never 
did  so,  and  consistently  rejected  all  proposals  to  contribute  to 
periodicals  on  current  topics.  No  doubt  this  was  due  in  some 
degree  to  weariness  of  work  of  the  sort :  ten  years  of  newspaper 
writing  had  sated  him.  In  part,  also,  it  was  due  to  innate 
conservatism  of  judgment.  But  most  of  all,  it  was  due  to  his 
ideal  of  the  duties  of  the  University  teacher.  Such  a  teacher 
should  be,  as  he  believed,  a  leader  in  thought  and  in  investiga- 
tion, elucidating  the  principles  on  which  the  solution  of  current 
problems  must  depend,  contributing  by  slow  accretions  to  the 
mass  of  information  on  which  the  advance  of  knowledge  must 
rest,  and  leaving  it  for  others  to  spread  abroad  and  apply  the  results 
of  the  scholar's  research. 

While  thus  engaged  in  equipping  himself  more  fully  for  his 
duties  as  professor,  he  was  also  soon  drawn  into  the  adminis- 
trative work  of  the  University.  For  such  work  he  was  eminently 
fitted,  and  his  strong  sense  of  loyalty  to  the  University  and  to 
its  head  led  him  to  enter  on  it,  if  not  with  zest,  at  least  with 
strong  interest  and  willing  spirit.  In  1876  he  was  elected  Dean 
of  Harvard  College,  and  remained  in  that  post  until  1882.  When 
the  enlarged  and  remodelled  Faculty  of  Arts  and  Sciences  was 
organized  in  1890,  he  became  its  first  Dean,  and  so  acted  until 
1895.     In  addition,  he  served  repeatedly  on  committees,  and  his 


xii  INTRODUCTION 

aid  and  counsel  were  unfailingly  asked  when  any  large  question 
of  policy  was  under  consideration.  Of  such  questions  there  was 
a  plenty  throughout  his  academic  career.  President  Eliot  found 
in  him  a  warm  friend,  as  well  as  a  stanch  supporter  and  wise 
counsellor,  and  frequently  called  on  him  for  conference  and 
advice.  The  great  measures  of  that  brilliant  administration, — 
the  extension  of  the  elective  system,  the  increase  and  broadening 
of  the  requirements  for  admission,  the  liberal  and  manly  policy 
in  dealing  with  undergraduates,  the  elevation  of  the  professional 
schools,  the  creation  and  fostering  of  advanced  instruction  and  of 
the  Graduate  School, — all  enHsted  his  support,  and  all  brought  a 
drain  on  his  time  and  energy.  The  labor  he  was  thus  called  on 
to  perform  was  cheerfully  assumed  and  borne,  yet  was  felt  to  be 
a  distraction  from  the  scholarly  work  which  he  regarded  as  the 
vital  part  of  his  academic  duties. 

The  various  circumstances  described  in  the  preceding  para- 
graphs —  the  ten  years  of  newspaper  work,  the  period  of  conscien- 
tious preparation  for  the  professor's  duties,  the  repeated  pressure 
of  administrative  work  —  account  for  the  comparatively  small 
amount  of  Professor  Dunbar's  publications.  In  1876  he  con- 
tributed to  the  North  American  Review,  then  still  a  scholarly 
repertory,  the  article  on  "  Economic  Science  in  America,"  which  is 
the  first  of  the  papers  reprinted  in  the  present  volume.  After 
this  modest  beginning  there  was  a  long  period  of  silence.  For  the 
use  of  his  classes  in  the  University,  he  soon  began  to  collect  docu- 
ments and  put  together  materials ;  and  out  of  these  grew  impor- 
tant works.  The  financial  history  of  the  United  States  had  of 
necessity  enlisted  his  attention  while  editing  the  Advertiser,  and  he 
early  prepared  careful  lectures  on  this  subject.  For  use  in  connec- 
tion with  the  lectures,  he  printed  privately,  in  1875,  a  selection  of 
the  laws  of  the  United  States  on  currency  and  finance.  His  researches 
steadily  widened,  and  as  the  instruction  in  the  University  grew,  he 
gave  an  independent  course  on  the  financial  history  of  the  country, 
—  a  course  remembered  with  admiration  by  a  long  series  of  grate- 
ful students.  For  use  in  this  instruction  he  published  in  1891  the 
volume  of  "  Laws  of  the  United  States  on  Currency,  Finance,  and 
Banking  "  (Boston  :  Ginn  &  Co.).  To  the  average  reader,  and  even 
to  some  hasty  fellow-scholars,  this  had  the  appearance  of  an  easy 
task  :  a  simple  reprint  of  matter  from  the  statute-book.     But  the 


INTRODUCTION  xiii 

selection  of  all  the  important  laws,  the  rejection  or  compression  of 
the  less  important,  the  unearthing  of  vetoed  bills  and  other  histori- 
cal documents,  the  cross-references  to  apposite  sources,  —  these 
show  the  author's  scholarly  qualities  at  their  best.  The  volume  is 
characteristic  in  another  way.  It  was  Professor  Dunbar's  undevi- 
ating  habit  to  turn  to  the  primary  sources  of  information,  to 
statutes,  official  documents,  the  writings  of  contemporaries.  He 
trained  his  students  likewise  never  to  content  themselves  with 
secondary  sources.  Hence  he  prepared  for  their  use  collections  of 
documents  such  as  this  volume  contained,  modestly  putting  in  the 
background  his  own  skill  and  labor  in  selection  and  preparation. 

The  book  by  which  he  is  best  known  to  the  general  public 
grew  in  a  similar  way  out  of  his  teaching.  Side  by  side  with  his 
general  economic  reading,  he  began  at  an  early  date  to  give  special 
attention  to  the  subjects  which  most  attracted  him,  —  the  theory 
and  history  of  currency,  banking,  and  pubhc  finance.  Finding  no 
serviceable  book  to  put  into  the  hands  of  his  students,  he  prepared 
something  on  banking,  as  he  had  done  on  financial  history.  In 
1885  he  printed  for  the  use  of  students,  again  privately,  certain 
chapters  on  banking.  Expanded  and  revised,  these  were  published 
in  1891,  under  the  title  "Chapters  on  the  Theory  and  History  of 
Banking"  (New  York:  G.  P.  Putnam's  Sons).  A  second  edition, 
again  revised  throughout,  was  in  course  of  preparation  and  well 
advanced  at  the  time  of  his  death,  and  was  carried  to  completion 
by  the  editor  of  the  present  volume.  Dr.  O.  M.  W.  Sprague.  The 
little  volume  shows  Professor  Dunbar's  qualities  at  their  best,  and 
deserves  its  place  as  a  classic  on  the  subject.  Planned  originally 
for  the  use  of  college  students,  it  retained  in  the  successive  editions 
the  directness  and  conciseness  of  a  book  addressed  to  those  new 
to  the  topic.  Yet,  ahke  in  the  exposition  of  principles  and  in  their 
illustration  by  concrete  example  and  by  history,  it  goes  to  the  root 
of  things,  and  leaves  the  most  competent  critic  with  no  sense  of  diffi- 
culties skimmed  over.  A  wide  range  of  learning  is  shown  in  the 
notes  and  the  historical  sketches,  yet  with  no  parade,  and  with 
rigid  exclusion  of  irrelevant  matter. 

In  1886  the  University  was  enabled,  by  the  gift  of  an  adequate 
guarantee  fund,  to  authorize  the  publication  of  the  Quarterly  Journal 
of  Economics,  of  which  Professor  Dunbar  was  at  once  appointed 
editor.     The  establishment  of  the  Journal  opened  virtually  a  new 


xiv  INTRODUCTION 

phase  in  his  career.  For  the  remaining  years  of  his  life  he  gave 
to  it  a  large  share  of  his  time.  The  task  of  editing  was  congenial 
to  one  of  his  reserved  temperament ;  and  a  taste  for  work- 
manlike effects  made  him  take  a  satisfaction  in  the  niceties  of 
typography  and  appearance,  as  well  as  in  solidity  of  contents. 
His  guiding  principle  as  editor  was  the  sound  and  simple  one  of 
conducting  a  journal  for  investigators,  a  medium  of  communication 
for  those  who  had  something  to  contribute  to  the  advance  of 
knowledge.  He  succeeded  from  the  outset  in  making  for  the 
Journal  a  distinguished  place  in  the  literature  of  the  subject,  and 
in  securing  notable  papers  from  scholars  the  world  over.  Through 
it  he  exercised  an  important  influence  in  stimulating  the  remarkable 
advance  of  economic  science  which  took  place  in  the  United  States 
in  the  decade  after  its  establishment ;  and  Professor  Dunbar  was 
content  with  what  he  had  here  achieved,  and  found  in  it  some  solace 
for  his  failure  to  carry  out  plans  for  independent  publication. 

His  own  contributions  to  the  Journal,  however,  were  important 
both  in  quality  and  quantity.  As  it  happened,  the  teaching  staff  in 
the  department  of  economics  at  Harvard  University  was  enlarged  at 
the  time  of  the  establishment  of  the  Journal,  and  he  was  enabled 
to  turn  over  to  younger  hands  the  instruction  in  parts  of  the  sub- 
ject of  which  he  had  grown  weary,  and  to  devote  himself  to  others 
that  had  always  chiefly  interested  him.  His  duties  as  editor  at 
the  same  time  impelled  him  to  put  together  some  results  of  his 
researches.  But  for  this  pressure,  much  more  of  the  work  he  had 
planned  would  probably  have  been  left  undone.  Great  modesty 
and  a  high  degree  of  indifference  to  the  world's  applause 
combined  with  lack  of  physical  vigor  in  making  him  slow  to 
put  pen  to  paper.  Fortunately,  the  obligations  which  he  felt 
as  editor  led  him  to  contribute  with  some  degree  of  freedom  to 
the  columns  of  his  Journal.  The  present  volume  is  made  up 
chiefly  of  those  contributions.  They  tell  their  own  tale  as  to 
the  quality  of  his  mind  and  the  range  of  his  interests.  Those 
on  current  problems,  —  on  the  lessons  of  our  legal  tender  cur- 
rency, on  the  remodelling  of  the  national  banking  system,  on  the 
income  tax, — naturally  attracted  mo.st  attention  at  the  time  of 
their  publication,  and,  in  the  slow  progress  of  reform,  will  be  read 
with  profit  for  years  to  come.  But  their  author  took  greater  sat- 
isfaction in  the  papers  on  less  familiar  topics,  such  as  those  on  the 


INTRODUCTION  xv 

Bank  of  Venice,  the  Precedents  followed  by  Alexander  Hamilton, 
and  the  history  of  the  Direct  Tax  in  the  United  States.  He  had  a 
just  pride  in  doing  a  task  thoroughly,  —  in  putting  on  record  once 
for  all  the  definitive  results  of  exhaustive  inquiry. 

These  papers,  though  each  is  in  a  sense  complete  in  itself,  are 
yet  fragments  from  larger  work.  Those  on  the  finances  of  the 
United  States  are  the  outcome  of  prolonged  investigation,  cover- 
ing the  whole  range  of  the  subject,  which  was  expected  to  lead  to 
a  systematic  history.  Unfortunately  Professor  Dunbar  allowed 
himself  to  be  deterred  from  this  project,  for  which  no  one  was 
so  well  equipped,  by  the  publication  of  a  pretentious  but  highly 
unsatisfactory  book  by  another  hand  on  the  same  subject.  He  had 
pushed  his  way  into  the  literature  on  the  history  of  banking  ;  and 
here  also  the  essays  on  the  Bank  of  Venice  in  the  present  volume, 
and  the  chapter  on  the  Bank  of  Amsterdam  in  his  book  on  Bank- 
ing, represent  only  a  portion  of  his  learning.  He  had  gathered  a 
large  and  interesting  store  of  contemporary  material  on  the  Assig- 
nats  of  the  French  Revolution,  and  had  noted  the  peculiarities  in 
the  course  of  the  depreciation  of  that  curious  issue  of  paper  money. 
He  had  followed  the  history  of  commercial  crises  through  two  cen- 
turies, with  special  regard  to  the  supposedly  regular  recurrence  of 
these  industrial  storms,  and  had  begun  the  preparation  of  a  care- 
ful monograph  on  the  question  of  their  periodicity.  He  had  made 
an  exhaustive  study  of  the  financial  administration  of  Alexander 
Hamilton ;  but  of  this  also  nothing  was  put  on  record  except  the 
essay  on  the  Precedents  followed  by  Hamilton.  He  had  conducted 
at  the  University  systematic  courses  of  instruction  on  still  other 
topics:  on  the  theory  and  methods  of  taxation  ;  on  financial  admin- 
istration and  public  debts  in  the  leading  countries ;  and  on  the 
economic  history  of  Europe  and  America  since  1763.  On  the 
subject-matter  of  these  courses  he  was  led  both  by  an  alert  intel- 
lectual curiosity  and  by  conscientious  devotion  to  academic  duty, 
to  carry  his  work  much  farther  than  was  called  for  by  the  strict 
needs  of  teaching.  He  cannot  be  absolved  from  the  blame  of  hav- 
ing in  some  degree  scattered  his  energies. 

Among  the  notes  and  papers  found  after  Professor  Dunbar's 
death,  some  were  in  such  a  stage  of  completion  as  to  warrant 
their  publication.  He  had  begun  a  history  of  banking  in  the 
United  States  since  i860,  and  of  this  the  first  three  chapters  were 


xvi  INTRODUCTION 

virtually  completed.  They  are  printed  in  the  present  volume,  and 
illustrate  adequately  the  style  and  the  method  of  his  maturest 
days.  Of  quite  a  different  kind  are  the  accounts  of  the  crises  of 
1857  3-i^d  i860.  They  were  prepared  at  an  early  stage  in  his  aca- 
demic career ;  certainly  as  early  as  1875,  and  not  improbably  before 
1876.  That  Professor  Dunbar  left  these  papers  in  his  desk  for 
over  twenty  years  without  taking  any  steps  toward  printing  them, 
indicates  that  he  was  not  disposed  to  give  them  to  the  public ;  and, 
indeed,  the  mode  of  treatment  is  not  such  as  he  would  have  followed 
in  later  years.  Yet  they  are  contributions  of  no  mean  value  to  the 
economic  history  of  the  United  States  and  to  the  history  of  crises, 
and  are  accordingly  included  in  the  present  volume,  notwithstanding 
the  author's  evident  doubts  as  to  their  suitability  for  publication. 

Professor  Dunbar  was  by  nature  reserved,  and  as  to  his  own 
work  unduly  modest.  With  his  reserve  went  a  quiet  dignity  which 
was  often  mistaken  for  coldness.  Even  those  who  enjoyed  his 
closer  acquaintance  sometimes  found  him  silent  and  uncommuni- 
cative. But  in  intercourse  with  intimate  friends  this  veil  disap- 
peared, and  he  became  no  less  warm-hearted  than  charming.  He 
had  a  keen  sense  of  humor,  enjoyed  alike  to  hear  and  to  tell  a 
good  story,  and  saw  the  mirthful  side  of  every  subject.  These 
attractive  lighter  qualities  unfortunately  showed  themselves  little 
in  his  dealings  with  students.  With  classes  of  mixed  undergradu- 
ates he  never  was  a  highly  successful  teacher.  He  hesitated  to 
commit  himself  on  those  large  questions,  the  most  difficult  to 
answer,  which  arise  in  a  survey  of  the  subject  as  a  whole,  and  he 
was  thus  less  effective  and  stimulating  than  one  who  was  willing 
rashly  to  plunge  into  the  discussion  of  fundamentals.  On  the 
other  hand,  he  was  an  ideal  teacher  on  the  special  topics  to  which 
he  confined  himself  in  the  later  years  of  his  life.  He  had  a  re- 
markable gift  of  clear  and  well-ordered  exposition,  and  a  remark- 
able command  of  apposite  language.  The  rounded  stateliness  of 
diction  which  marks  his  writings  showed  itself  also  in  his  lectures. 
Here,  with  a  moderate  number  of  selected  students,  his  sound 
judgment,  his  judicial  temper,  his  nice  discrimination,  his  thorough 
information,  were  fully  appreciated.  Those  who  had  the  privi- 
lege of  his  instruction  under  these  favorable  conditions  felt  for 
him  a  reverent  admiration,  and  took  from  his  lecture  rooms  noble 
ideals. 


INTRODUCTION  XvU 

During  the  last  ten  years  of  his  life  Professor  Dunbar's  work  was 
much  interrupted  by  ill-health  and  waning  strength.  It  was  probably 
a  sense  of  physical  weakness  that  led  to  the  slowness  and  hesitation 
with  which,  notwithstanding  years  of  experience  in  writing,  he  took 
pen  in  hand  for  literary  work.  He  had  always  to  nerve  himself  to 
this  task  ;  though  when  once  it  was  entered  on,  the  result  was  invari- 
ably happy  and  seemingly  spontaneous.  No  doubt  the  same  sense 
of  weakness  was  in  some  degree  the  cause  of  the  scattering  of  his 
energies,  to  which  reference  has  already  been  made  in  this  sketch. 
He  found  it  easier  and  more  interesting  to  begin  on  new  subjects 
and  follow  new  clews  than  to  persist  in  bringing  to  a  close  investi- 
gations already  well  advanced.  And  yet,  all  in  all,  in  view  of  the 
difficulties  he  had  to  surmount,  the  surprising  thing  is  not  that  he 
did  so  little,  but  that  he  should  have  succeeded  in  achieving  so 
much. 

The  editing  of  the  present  volume  has  been  in  the  hands  of 
Dr.  O.  M.  W.  Sprague,  who  was  Professor  Dunbar's  assistant 
during  the  last  years  of  his  activity  as  teacher.  For  those  papers 
which  had  already  been  published,  Dr.  Sprague's  task  was  the 
comparatively  easy  one  of  arranging  them  in  proper  order.  But 
for  those  which  were  left  unpublished,  especially  the  three  chap- 
ters on  the  history  of  banking  in  the  United  States,  much  remained 
for  him  to  do,  in  verifying  and  completing  the  references,  and  in 
bringing  the  manuscript  as  nearly  as  possible  into  the  form 
which  the  author  would  have  wished.  All  credit  for  the  volume 
as  it  stands  belongs,  after  the  lamented  author,  to  Dr.  Sprague. 

F.  W.  Taussig. 


ECONOMIC  SCIENCE   IN  AMERICA,  1 776-1 876  i 

The  century  which  has  elapsed  since  our  independence  was 
declared  exactly  covers  the  period  for  which  the  science  of  politi- 
cal economy  has  been  a  systematized  branch  of  human  learning 
and  research.  Before  the  pubhcation  of  Adam  Smith's  "  Wealth 
of  Nations"  in  1776,  we  have,  indeed,  discussions  of  detached 
topics,  and  even  attempts  here  and  there  to  throw  the  whole  into 
connected  form ;  but,  after  all,  the  economist  finds  the  foundations 
of  the  science,  as  it  stands  to-day,  laid  deep  and  solid  for  the  first 
time  by  Adam  Smith ;  the  great  men  who  have  since  carried  for- 
ward the  work  have  declared  themselves  his  followers,  and  in 
developing  and  extending  the  science  have  kept  to  the  lines  of 
discussion  which  he  laid  down  with  such  vigor  and  insight  a 
century  ago. 

The  science  which  is  thus  coeval  with  our  nation  has  been 
studied  with  zeal  and  with  measurable  success  in  most  parts  of 
the  world.  New  principles  have  been  evolved,  tested  by  the 
abundant  experience  of  modern  industry,  and  added  to  the  body 
of  ascertained  truths.  Unceasing  discussion  has  enforced  constant 
revision  of  the  whole  work,  with  increase  of  firmness  and  consist- 
ency as  the  issue  of  every  threatened  revolution.  The  field  prop- 
erly occupied  by  the  science  has  been  surveyed  and  its  limits 
determined,  even  to  the  disappointment  of  overambitious  econo- 
mists or  of  a  too  expectant  public.  No  other  moral  science  has 
equally  engaged  the  attention  of  public  men,  and  no  other,  it  is 
safe  to  say,  has  equally  influenced  public  affairs,  whether  by  the 
correct  or  the  incorrect  application  of  its  principles.  Nor  has  any 
nation  had  the  monopoly  of  honors  gained  in  this  new  pursuit. 
Adam  Smith,  Ricardo,  and  Mill  have  secured  the  leading  position 
for  England ;  but  France  and  Germany,  and  perhaps  Italy,  have 
made   contributions   of    lasting    importance    to   the   subject,    and 

1  North  American  Review,  January,  1876. 
B  I 


2  ESSAYS 

have  never  been  without  then-  full  proportion  of  active  and 
judicious  investigators.  Notwithstanding  the  priority  of  England 
in  some  remarkable  advances,  the  centre  of  interest  in  economic 
discussion  has  not  always  rested  with  her;  it  has  at  times  been 
in  France ;  it  is  now,  probably,  in  Germany.  In  short,  the  science 
has  been  made  a  common  possession  by  the  efforts  of  all. 

When  we  come  to  inquire  what  part  our  own  country  has  taken, 
and  what  contribution  it  has  made  in  building  up  this  science,  we 
are  struck  at  the  outset  by  the  fact  that  the  growth  of  the  United 
States  has  been  a  circumstance  of  prime  importance  in  the  eco- 
nomic history  of  the  world  during  the  century.  It  must  be  placed 
in  the  same  rank  with  the  brilliant  succession  of  discoveries  in  the 
industrial  arts,  or  with  the  extensive  improvement  of  government 
and  social  organizations,  as  one  of  the  half-dozen  great  influences 
which  have  changed  the  face  of  the  civilized  world.  Without 
entering  into  the  details  of  a  comparison,  to  which  every  reader 
is  likely  to  have  his  attention  sufficiently  drawn  during  the  present 
year,  we  may  here  note  a  few  of  the  facts  which  have  given  to  the 
development  of  this  country  so  great  an  influence  upon  that  of 
the  rest  of  the  world.  Beginning  with  the  statement  of  mere 
area,  the  organized  states  of  the  Union  now  occupy  a  territory  larger 
than  the  whole  of  Europe,  outside  of  the  Russian  Empire.  The 
improved  land  of  these  states,  measuring  two  hundred  and  ninety- 
five  thousand  square  miles  in  1870,  cannot  be  much  less  than  the  total 
improved  surface  of  England  and  Ireland,  France  and  Prussia,  to- 
gether. Of  this  vast  field  of  production,  we  may  fairly  say  that  the 
whole  has  been  brought  into  the  circle  of  international  exchanges 
and  added  to  the  available  resources  of  mankind  within  this  cen- 
tury, so  insignificant  were  its  relations  with  the  rest  of  the  world  a 
hundred  years  ago.  Moreover,  the  products  to  which  this  territory 
is  adapted  by  nature  are  such  as  have  a  singularly  direct  and 
important  bearing  on  the  welfare  of  other  countries.  How  great 
an  industrial  revolution  has  been  wrought  by  cotton,  and  what  the 
nineteenth  century  would  be  without  that  fibre,  of  which  we  pro- 
duce more  than  half  of  all  that  comes  to  the  markets  of  Europe 
and  America,  it  would  be  hard  to  say ;  but  the  memory  of  our  Civil 
War  is  still  fresh  enough  to  tell  us  what  universal  disaster  must 
follow  the  interruption  of  our  supply,  and  what  a  chain  of  conse- 
quences, involving  the  well-being,  the  peace,  the  institutions,  and 


ECONOMIC    SCIENCE    IN   AMERICA  3 

even  liberty  of  millions  of  men,  have  followed  from  the  addition  of 
the  cotton-plant  to  the  agricultural  products  of  the  South.  Of  dif- 
ferent but  hardly  inferior  significance  in  the  economy  of  the  world 
is  our  supply  of  gold.  The  astonishing  expansion  of  industry  and 
commerce  for  which  the  close  of  the  wars  of  Napoleon  seems  to 
have  given  the  signal,  which  has  stimulated  and  been  stimulated 
by  our  growth,  is  one  of  the  great  phenomena  in  the  history  of 
mankind.  This  expansion,  however,  must  have  been  checked  at 
the  most  critical  period,  had  not  fresh  discoveries  of  gold  supplied 
the  enlarged  medium  of  exchange  required  by  the  new  scale  of 
transactions ;  and  of  this  series  of  discoveries,  the  second  in  impor- 
tance in  recorded  history,  California  made  one  of  the  chief  and 
also  the  earliest.  From  that  time  the  United  States  have  con- 
tinued to  be  the  first  in  importance  of  the  sources  of  gold;  and 
were  this  our  only  economic  relation  to  the  rest  of  the  world,  the 
influence  of  our  rise  as  a  nation  upon  the  general  well-being  must 
be  admitted  to  be  direct  and  powerful  in  an  extraordinary  degree. 
Tobacco,  one  of  our  earliest  staples  for  export,  has  become  not 
only  an  article  of  great  moment  in  the  revenue  systems  of  several 
leading  nations,  but  stands  in  a  peculiar  relation  as  one  of  the  few 
luxuries  which  enters  largely  into  the  consumption  of  the  poorer 
classes  of  all  countries,  thus  requiring,  as  it  were,  a  social  impor- 
tance far  beyond  its  simple  pecuniary  value.  And  of  tobacco,  the 
United  States  are  now  the  leading  source  of  supply  for  England, 
France,  and  Germany.  To  turn  from  this  to  petroleum,  one  of  our 
newest  staple  articles  of  export,  and  now  the  third  or  fourth  in 
importance  on  our  list,  it  may  be  doubted  whether  to  the  majority 
even  the  ludicrous  incidents  of  the  discovery  do  not  continue  to  be 
more  familiar  than  the  reflection  that  by  the  timely  introduction 
of  a  cheap  and  excellent  artificial  light  an  immense  boon  was 
conferred  upon  a  large  part  of  the  civilized  world.  And  last 
among  those  economically  important  natural  products  to  which 
we  shall  refer  are  the  cereals.  Our  capacity  for  the  supply  of 
these,  although  of  secondary  importance  in  the  markets  of  other 
countries,  has  made  it  possible  for  us  to  sustain  an  increase 
of  population  which,  for  years,  has  been  cited  as  the  standard 
example  of  maximum  natural  growth.  This  abundance  of  cheap 
food  has  also  made  it  for  our  interest,  simultaneously  with  this 
rapid  natural  increase  of  numbers,  to  invite  from  the  Old  World 


4  ESSAYS 

an  immigration  on  a  scale  so  vast  as  to  constitute  in  itself  an 
economic  phenomenon  of  no  mean  order,  the  result  being  the 
relief  of  the  older  countries  from  a  serious,  if  not  dangerous, 
pressure  of  numbers,  by  the  transfer  to  our  shores  of  more  than 
nine  miUions  of  people,  or  a  number  equal  to  the  whole  population 
of  Great  Britain  at  the  date  of  our  independence.  And  the  popu- 
lation thus  established  on  our  soil,  whether  native  bo-n  or  of 
immediate  foreign  extraction,  has  proved  to  be  no  inert  mass,  but, 
from  the  start,  has  been  active  and  resolute  to  a  fault,  in  improving 
all  material  advantages  and  in  pushing  its  way  to  a  place  among 
the  great  powers  of  the  modern  world.  Mineral  resources  of 
remarkable  variety,  and  of  extent  not  even  yet  fully  measured, 
together  with  fortunate  conditions  of  physical  geography,  have 
seconded  these  efforts  and  often  enabled  us  to  enter  into  sharp 
competition  with  the  longer  established  industries  of  Europe.  To 
excellent  natural  facilities  for  communication  has  been  added  a 
railway  system  of  seventy-five  thousand  miles,  being  little  less  than 
half  the  railway  mileage  of  the  world,  and  going  far  to  neutralize 
the  disadvantages  of  great  distances,  which,  in  some  directions, 
threatened  to  hamper  our  growth.  A  mercantile  marine,  which 
even  in  its  present  depressed  condition  is  not  far  short  of  the  great- 
est on  the  ocean,  and  is  of  nearly  double  the  magnitude  of  its  next 
competitor,  helps  in  part  to  connect  this  vast  internal  network 
with  the  general  commercial  system  of  the  world.  So  great,  how- 
ever, is  the  volume  of  our  exchanges  with  other  countries,  that 
scarcely  one-third  of  it  is  transported  by  our  own  shipping.  With 
the  mother-country,  especially,  our  commerce  has  grown,  until  it 
overshadows  that  of  every  other  nation  with  whom  she  carries  on 
a  trade  either  of  export  or  of  import.  What  a  growth  this  has 
been  is  shown  by  the  fact  that  the  steam-tonnage  now  annually 
cleared  for  New  York  alone  from  the  United  Kingdom  exceeds 
the  total  tonnage  of  ships  annually  cleared  for  all  parts  of  the 
world  down  to  the  close  of  our  Revolution. 

In  the  process  of  development  indicated  by  these  few  leading 
facts,  the  United  States,  by  a  natural  and  steady  though  rapid 
movement,  have  taken  among  commercial  nations  a  place  not 
lower  than  the  second,  and  likely  soon  to  become  the  first,  —  the 
second  or  first  place  it  must  be  remembered,  in  a  changed  world, 
and  in   a  scale  of  magnitudes  hardly  comparable  with  those  of 


ECONOMIC   SCIENCE   IN   AMERICA  5 

1776.  We  have  advanced  to  the  front  among  competitors  who 
were  themselves  all  rapidly  advancing.  But,  with  improved  facili- 
ties for  intercourse,  the  economic  ties  between  countries  have  been 
vastly  multiplied  and  strengthened,  and  to  hold  a  leading  posi- 
tion in  commerce  now  implies  a  direct  connection  with  the  prog- 
ress of  others  and  with  their  material  well-being,  immeasurably 
closer  than  has  ever  existed  before.  Every  fresh  conquest  over 
nature  made  by  us  belongs  to  the  family  of  nations  also,  and  every 
loss  suffered  by  us  is  also  their  loss.  Infinite  mutually  dependent 
interests  unite  us  with  Europe  and  with  the  very  antipodes.  Every 
pulsation  in  the  financial  system  is  felt  alike  on  each  side  of  the 
Atlantic.  A  crisis  in  London  has  its  instant  counterpart  here,  and 
the  great  revulsions  which  periodically  sweep  over  the  commercial 
world  may  begin,  almost  as  chance  may  dictate,  in  New  York  or 
in  Vienna. 

The  value  of  the  triumphs  of  material  development  achieved 
by  the  United  States  is  not  to  be  underrated.  They  represent  but 
one  side  of  human  progress,  but  their  influence  on  interests  of  a 
higher  order  is  immediate  and  powerful.  The  world  cannot  yet 
dispense  with  the  stimulus  which  the  search  for  wealth  gives  to 
some  of  the  pursuits  and  institutions  which  most  elevate  and  en- 
noble civilized  life.  Doubtless  Carlyle  is  right  when  he  says  that 
"  America's  battle  is  yet  to  fight.  .  .  .  Their  quantity  of  cotton, 
dollars,  industry,  and  resources  I  believe  to  be  almost  unspeak- 
able ;  but  I  can  by  no  means  worship  the  like  of  these."  But 
these  have  been  one  of  the  great  factors  in  producing  whatever 
of  progress  and  hope  the  world  has  gained  in  our  age.  If  not  to 
be  worshipped,  they  are  still  not  to  be  despised,  for  from  them 
comes,  as  must  be  admitted,  much  that  is  itself  worshipful.  Even 
our  merely  material  growth  may  then  fairly  be  a  subject  of  pride, 
so  long  as  we  remember  that  it  is  itself  only  the  means  for  higher 
ends. 

Standing  in  this  relation  to  the  general  advance  in  wealth 
which  the  world  has  made,  it  might  have  been  thought  in  advance 
that  the  United  States  would  be  prompt  in  investigating  the  laws 
which  govern  all  economic  progress.  The  philosopher  who  could 
have  foreseen  in  1776  the  amazing  career  of  the  weak  and  scantily 
peopled  colonies  which  then  took  their  place  as  an  independent 
power,  might  easily  have  been  persuaded  that  the  new  science. 


6  ESSAYS 

then  having  its  birth  and  treating  of  "  the  nature  and  causes  of  the 
wealth  of  nations,"  would  be  taken  up  by  this  people  with 
especial  animation  and  success.  "  Here,"  he  might  have  said, 
"  is  the  beginning  of  an  inquiry  into  the  nature  and  causes  of  that 
which  will  chiefly  occupy  the  new  nation.  Others  in  their  matur- 
ity or  decadence  may  prosecute  this  inquiry  in  the  hope  of  dis- 
covering the  means  of  escape  from  impending  evil ;  this  people 
will  pursue  it  with  the  enthusiasm  of  strengthening  youth.  Success 
in  this  investigation  and  a  wise  application  of  its  results  will 
account  for  the  splendid  triumphs  in  the  acquisition  of  material 
wealth,  which  are  to  distinguish  the  first  century  of  independent 
national  life."  How  far  the  imagined  anticipations  of  our  philoso- 
pher have  been  verified,  and  the  reason  for  their  failure  so  far  as 
they  may  be  found  to  have  failed,  is  the  object  of  the  review  on 
which  we  now  enter. 

The  condition  in  which  the  breaking  out  of  our  Revolution 
found  the  study  of  economic  science  in  this  country  is  well  exem- 
plified by  the  writings  of  Franklin.  Of  all  our  public  men  of  that 
period  he  was  the  one  whom  we  should  perhaps  most  naturally 
expect  to  find  dealing  with  this  class  of  subjects,  and,  if  not  pro- 
foundly investigating  the  causes  of  phenomena,  at  least  deriving 
from  observation  and  reflection  sound  and  consistent  rules  for 
practical  guidance.  His  activity  in  the  political  discussions  of 
more  than  half  a  century,  and  his  natural  fondness  for  every  in- 
quiry respecting  material  well-being,  seem  to  mark  him  out  as  the 
American  who  must  deal  with  political  economy  if  any  one  did, 
and  the  one  who  could  rise  to  the  level  of  the  national  thought  in 
economic  speculation,  if  he  did  not  soar  much  beyond  it.  Frank- 
lin wrote  upon  topics  of  this  class  from  his  twenty-third  year,  and 
probably  wrote  as  well  in  his  twenty-third  year  as  he  ever  did. 
The  questions  of  currency  then  raised  in  every  colony  by  the 
paper  issues  of  the  colonial  governments  he  had  occasion  to  treat 
of  at  several  different  times.  But  the  support  which  he  gave  to 
issues  of  that  kind  rests  on  no  well-defined  systematic  body  of 
opinions ;  indeed,  his  discussion  of  the  continental  currency,  in 
some  of  his  letters,  raises  questions  as  to  his  clearness  of  percep- 
tion in  morals  as  well  as  in  political  economy.  He  is  quoted  with 
admiration  by  writers  of  the  ])rotectionist  school,  and  he  might 
equally  well  be  quoted  by  their  opponents.     He  was  in  fact  a  man 


ECONOMIC   SCIENCE   IN   AMERICA  7 

of  expedients  rather  than  principles,  often  sagacious  in  deahng 
with  immediately  practical  questions,  but  satisfied  with  the  crudest 
speculations  as  to  the  operation  of  causes  in  any  way  remote.  His 
economic  writings  were  edited  for  Mr.  Sparks's  collection  of  his 
works  by  the  late  Judge  Phillips,  himself  an  economist  of  no  mean 
capacity ;  and  the  annotations  of  the  editor  afford  ample  evi- 
dence that  he  found  it  no  easy  task  to  present  with  respectful 
comment  and  due  admiration  the  mass  of  ill-digested  reasoning 
placed  in  his  hands.  That  Franklin  read  much  of  the  writings 
of  others  on  questions  of  political  economy  is  not  to  be  inferred 
from  his  works.  Smith's  "  Wealth  of  Nations  "  is  cited  in  a  paper 
on  the  increase  of  wages  in  Europe  likely  to  be  caused  by  the 
American  Revolution,  written  shortly  after  1780,  when  Franklin 
was  abroad ;  but  the  citation  is  made  to  settle  a  fact,  and  not  to 
further  the  discussion  or  elucidation  of  a  principle. 

Of  Franklin  then  it  must  be  said,  that  he  not  only  did  not 
advance  the  growth  of  economic  science,  but  that  he  seems  not 
even  to  have  mastered  it  as  it  was  already  developed ;  and  little 
more  can  be  said  for  any  of  our  public  men  or  writers  during  the 
period  of  Franklin's  activity.  We  find  no  one  well  versed  in 
economic  theory  and  entering  upon  speculative  inquiries  of  real 
value  until  we  come  to  Alexander  Hamilton.  That  great  man, 
whose  remarkable  career  was  finished  at  the  point  when  most  men 
are  just  ready  for  action,  was  a  reader  and  inquirer  in  political 
economy  in  his  twentieth  year.  In  his  twenty-fifth  year,  in  such 
leisure  as  the  camp  of  the  Revolution  afforded,  he  matured  a 
scheme  for  a  Bank  of  the  United  States,  and  became  a  corre- 
spondent of  Morris  on  that  subject.  And,  finally,  at  the  age  of 
thirty-four,  he  produced,  as  Secretary  of  the  Treasury,  his  great 
reports  on  the  Public  Credit,  on  a  National  Bank,  and  on  Manu- 
factures, the  most  powerful  and  comprehensive  discussion  of  the 
national  finances  ever  made  under  our  government,  and  the  sub- 
ject, it  may  be  remembered,  of  one  of  Mr.  Webster's  noblest 
periods.  Those  reports  bear  the  evidence  throughout  of  much 
reading  and  reflection  upon  the  experience  of  nations,  and  of 
careful  meditation  on  the  speculations  and  theories  of  previous 
writers.  Examination  of  the  report  on  Manufactures,  in  particu- 
lar, will  show  that  in  some  parts  of  it,  in  his  selection  of  topics 
and  even  in  the  order  in  which  they  are  marshalled,  Hamilton  was 


8  ESSAYS 

influenced  by  his  familiarity  with  Adam  Smith.  The  writings  of 
the  French  economists  were  probably  known  to  him  at  this  time, 
as  they  certainly  were  a  few  years  later,  and  some  of  the  doctrines 
of  this  school,  as  well  as  Smith's  concessions  to  them,  received 
from  him  a  successful  refutation.  Both  the  knowledge  of  eco- 
nomic questions  and  the  power  of  dealing  with  them  exhibited 
by  Hamilton  in  these  discussions  warrant  us  in  setting  him  down 
as  a  writer  who,  under  other  conditions  and  freed  from  the  press- 
ure of  public  business,  might  have  been  expected  to  make  some 
positive  contribution  to  the  development  of  economic  theory.  But 
his  few  crowded  years  left  him  little  opportunity  for  such  pursuits, 
and  it  would  now  be  hard  to  say  that  he  left  any  impression 
on  the  thought  of  the  world,  by  his  dealing  with  this  subject. 
His  reports  have  continued  to  be  the  arsenal  from  which  the 
advocates  of  special  measures  have  again  and  again  drawn  forth 
weapons  now  well  worn ;  but  systematic  political  economy  cannot 
be  said  to  owe  to  him  any  recognized  principle,  any  discovery  in 
method,  or  indeed  any  influence  save  the  stimulus  which  his 
example  must  always  afford  to  the  student  of  financial  history. 
If  Hamilton  did  not  permanently  influence  the  economic 
thought  of  the  world,  there  is  certainly  no  other  statesman  of 
that  period  for  whom  such  a  distinction  can  be  claimed.  Among 
Hamilton's  great  contemporaries  none  followed  the  discussions  of 
the  new  science  with  more  interest  than  Jefferson  and  Madison ; 
but  neither  of  these  statesmen  was  comparable  to  Hamilton  in  his 
mastery  of  the  subject.  Jefferson  had  that  fondness  for  it  which 
he  had  for  all  philosophical  speculation,  kept  himself  informed  as 
to  all  new  publications  abroad,  was  instrumental  in  bringing  some 
of  these  before  the  American  public,  and  corresponded  with  some 
of  the  leading  French  economists  of  his  day  ;  but  in  his  own  dis- 
cussions of  economic  questions  it  is  difficult  to  find  any  firm 
ground  of  logical  principle,  and  impossible  to  find  any  addition  to 
what  had  been  previously  ascertained  and  better  comprehended  by 
others.  Madison,  with  interests  less  diffuse  than  Jefferson's,  had 
a  much  firmer  hold  upon  this  subject.  He  appears  to  have  fol- 
lowed its  current  literature  with  close  attention,  a^d  to  have 
reflected  upon  principles  and  to  have  applied  them,  with  great 
although  not  uniform  force,  in  his  reasoning  upon  public  ques- 
tions.    It  is  interesting  to  find  Madison  —  and,  indeed,  Jefferson 


ECONOMIC    SCIENCE    IN   AIVIERICA  9 

also  — giving  in  an  early  adhesion  to  the  doctrines  of  Malthus  on 
population,  and  defending  them  by  arguments  from  the  experience 
of  the  United  States.  But  Madison  could  make  as  little  pretension 
as  Jefferson  to  having  added  any  results  of  original  investigation 
to  the  work  of  others.  His  merit  was  not  as  an  economist,  but  as 
a  statesman  who  conscientiously  prepared  himself  for  the  duties 
of  public  life  by  following  this  necessary  branch  of  a  statesman's 
studies.  Of  the  other  public  men  of  this  early  period  of  our 
history  we  need  mention  only  Robert  Morris  and  Gallatin  ;  and 
of  these  eminent  practical  financiers  the  latter  only  has  any  claim 
to  notice  in  connection  with  scientific  theory.  The  memorial 
drawn  up  by  him  and  presented  to  Congress,  in  1832,  from  the 
Philadelphia  Convention  in  favor  of  tariff  reform,  is  a  full  and 
strong  statement  of  the  arguments  against  protection,  and  exhibits 
familiarity  with  the  results  of  theoretical  discussion,  as  well  as 
with  the  practical  side  of  the  question ;  but  the  complete  oblivion 
which  now  covers  the  document  shows  how  narrow  and  temporary 
is  the  influence  to  be  credited  to  it.  His  pamphlet  on  "  The 
Currency  and  Banking  System "  is  also  a  comprehensive  and 
sound  discussion  of  these  topics,  but  has  ceased  to  be  much 
referred  to,  except  for  historical  purposes. 

Of  the  great  m.en  of  the  next  generation,  Mr.  Calhoun  was 
doubtless  well  qualified  by  nature  for  this  field  of  investigation, 
and  displayed  a  strong  inclination  to  enter  upon  it;  but,  unhappily, 
every  mental  power  and  every  pursuit  at  last  became  subservient 
with  him  to  a  narrow  sectionahsm,  which  finally  frustrated  all  hope 
of  sound  fruit  from  a  laborious  life.  The  electric  power  with 
which  Mr.  Clay  acted  upon  the  emotions  of  men  was  not  coupled 
with  any  special  capacity  for  the  research  of  principles  ;  and  while 
his  name  is  inseparably  connected  with  the  "  American  system," 
his  argumentative  defence  of  that  system  is  practically  forgotten, 
—  so  much  easier  was  it  for  him  to  give  vogue  to  an  effective 
name,  than  to  give  a  scientific  basis  to  the  thing  itself.  Mr.  Web- 
ster discussed  with  great  power  many  questions  involving  general 
principles  of  political  economy,  but  he  never  cared  to  apply  his 
intellect  to  the  foundations  of  the  science.  Indeed,  in  one  of  his 
letters  he  says :  "  I  give  up  what  is  called  the  *  science  of  political 
economy.'  ...  I  believe  I  have  recently  run  over  twenty  vol- 
umes, from  Adam  Smith  to  Professor  Dew,  of  Virginia;  and  from 


10  ESSAYS 

the  whole,  if  I  were  to  pick  out  with  one  hand  all  the  mere  truisms, 
and  with  the  other  all  the  doubtful  propositions,  little  would  be 
left."  Whatever  else  may  be  said  of  this  passage,  it  absolves  us 
from  the  further  explanation  of  Mr.  Webster's  failure  to  contribute 
to  the  world's  advancement  in  economic  science.  Of  the  contem- 
poraries of  these  three  great  men,  the  other  champions  on  whose 
words  listening  senates  once  hung,  in  the  fierce  contest  over  tariff 
and  bank,  no  name  can  now  be  recalled  as  having  any  claim  to 
connection  with  the  development  of  the  science  of  which  we  speak. 
Lowndes,  Crawford,  Wright,  Berrien,  McDuffie,  Benton,  and  the 
others  may  yet  shine  in  our  political  history,  but  they  are  unknown 
in  political  science. 

And  if  we  examine  the  roll  of  statesmen  of  the  generation 
which  closes  our  century,  what  better  success  is  met .-'  We  find, 
indeed,  the  names  of  some  men  who  have  skilfully  managed  inter- 
ests of  vast  magnitude,  and  of  others,  not  in  great  number,  who 
have  shown  a  competent  scientific  knowledge ;  but  we  may 
safely  challenge  the  mention  of  one  who  has  added  to  the  stock  of 
economic  principles  with  which  the  world  was  already  acquainted, 
or  has  given  any  essential  assistance  in  their  elucidation.  As  a 
class  our  public  men  have  confined  themselves,  like  Franklin,  to 
the  sagacious  application  of  rules  of  thumb.  So  far  as  they  have 
dealt  with  the  science  at  all,  it  has  been  made  for  them  by  others ; 
and  they  have  not  aided  in  making  it.  Indeed,  the  promise  held 
out  by  Hamilton's  great  example,  of  the  thorough  examination  of 
questions  in  the  fight  of  ascertained  principles,  has  seldom  been 
fulfilled,  even  by  our  highest  officers  of  administration.  Few 
things,  in  fact,  are  more  noticeable  in  our  recent  political  history 
than  the  extreme  fragility  and  brevity  of  the  reputations  acquired, 
either  in  administration  or  in  legislation,  by  most  of  our  public 
men  who  have  assumed  to  deal  with  this  class  of  subjects. 

If  we  turn  from  the  statesmen  to  the  scholars  of  the  United 
States,  the  result  is  not  more  satisfactory.  Down  to  the  year  1820 
no  American  produced  any  treatise  on  political  economy  which  the 
world  has  cared  to  remember.  Such  books  of  that  period  as  come 
to  light,  upon  industrious  search  in  forgotten  corners,  are  crude, 
unsystematic,  full  of  empirical  notions,  and  are  now  intellectually 
obsolete.  The  philosophical  study  of  the  subject,  to  which  Adam 
Smith  gave  an  impulse  abroad,  was,  in  fact,  late  in  making  any 


ECONOMIC   SCIENCE   IN   AMERICA  H 

public  appearance  on  this  side  of  the  Atlantic.  The  increasing 
interest  in  it  is  shown  by  three  editions  of  the  "  Wealth  of  Nations  " 
(Philadelphia,  1789;  Hartford,  181 1  ;  ibid.,  1818),  and  by  the  re- 
printing of  Ricardo's  great  work  (Georgetown,  18 19)  only  two 
years  after  its  original  publication.  But  when  we  remember  that 
on  the  other  side  of  the  Atlantic  this  period  was  marked  by  the 
appearance  of  works  so  important,  and  in  some  cases  of  such  last- 
ing influence,  as  those  of  Malthus,  Say,  Ricardo,  and  Sismondi, 
the  poverty  of  American  thought  upon  the  subject  is  striking,  even 
if  we  allow,  as  we  must,  for  the  infancy  of  the  country  and  the 
consequent  small  number  of  its  literary  class.  In  the  twenty  years 
which  followed,  the  period  of  which  we  have  just  spoken,  a  toler- 
ably rapid  succession  of  treatises  by  American  authors  was  given 
to  the  public.  Raymond  (1820)  brought  to  the  discussion  zeal  and 
ingenuity,  but  such  looseness  of  method  and  want  of  precision  of 
ideas  as  to  defeat  his  efforts  and  destroy  the  value  of  his  work,  — 
which,  indeed,  from  its  confusion  of  definition  and  want  of  system, 
seems  a  late  growth  of  the  generation  which  preceded  Smith, 
rather  than  one  of  that  which  followed  him.  Alexander  H. 
Everett,  fresh  from  the  influences  of  a  long  residence  in  Europe, 
and  of  personal  intercourse  with  some  of  the  leading  economists 
of  the  world,  published  (1822)  an  answer  to  the  essay  of  Malthus 
on  Population,  which  holds  a  place  among  the  best  of  the  many 
attempts  made  in  this  direction  ;  but  his  dialectic  skill  was  not  able 
even  to  supply  the  opponents  of  the  Malthusian  doctrine  with  a 
common  standing  ground,  and  still  less  to  prevent  the  doctrine 
from  being  accepted  in  its  essentials  by  the  great  majority  of 
economists  who  have  followed,  and  even  by  many  who  imagine 
that  they  reject  it.  Dr.  Cooper,  of  South  Carolina,  issued  a  treat- 
ise (1826),  of  which  McCulloch  says  that,  "though  not  written  in 
a  very  philosophical  spirit,  it  is  the  best  of  the  American  works  on 
political  economy  that  we  have  met  with,"  —  an  encomium  meas- 
ured with  judicious  care.  Dr.  Cooper's  chief  success,  in  fact,  was  in 
reproducing  in  systematic  form  the  results  attained  by  the  English 
economists,  with  whose  works  he  was  well  acquainted ;  but  he  did 
nothing  in  original  speculation.  Willard  Phillips  produced  a  treat- 
ise (1828)  in  which,  treating  the  whole  structure  of  Malthus  and 
Ricardo  as  unsound,  he  sought  to  take  up  the  subject  where  Adam 
Smith  had  left  it.     He  treated  it  with  an  abundant  knowledge  of 


12  ESSAYS 

industrial  and  commercial  facts,  and  with  a  mind  well  trained  for 
speculative  inquiry ;  but  it  was  complained,  even  by  a  friendly  con- 
temporary critic,  that  he  reared  nothing  in  place  of  that  which  he 
sought  to  remove.  Rae's  book  (1834)  has  been  pronounced  by 
high  authority  to  be  a  valuable  discussion  of  the  subject  of  produc- 
tion ;  but  as  the  work  of  a  Scotchman  settled  in  Canada,  and  origi- 
nally intended  for  publication  abroad,  we  can  hardly  count  it  as 
an  American  contribution.  President  Wayland's  book  (1837)  is 
the  only  general  treatise  of  the  period  which  can  fairly  be  said  to 
have  survived  to  our  day ;  and  this,  it  must  be  admitted,  owes 
whatever  value  it  has  to  its  manner  of  presenting  for  easy  compre- 
hension some  of  the  leading  English  doctrines, — of  which,  how- 
ever, it  may  be  doubted  whether  the  author  ever  fully  recognized 
the  bearing.  Vethake's  treatise  (1838)  is  now  little  known,  its 
more  valuable  portion  having  served  its  purpose,  like  the  works  of 
Cooper  and  Wayland,  of  bringing  before  our  public  some  of  the 
results,  at  that  time  unfamiliar,  which  had  been  reached  by  writers 
not  then  well  understood  in  this  country.  Other  writers  of  this 
period,  like  Dew,  Newman,  Tucker,  and  Potter,  can  be  dismissed 
even  more  summarily,  so  transient  was  their  influence  and  so  com- 
pletely forgotten  are  their  works. 

The  years  which  followed  from  1840  down  to  the  war  for  the 
Union  were  for  natural  reasons  much  less  prolific  of  works  on 
political  economy  than  the  period  just  noticed.  The  stimulus 
given  to  the  study  of  the  science  by  the  extraordinary  advances 
made  in  it  by  the  great  English  investigators  had  ceased  to  be 
active ;  questions  of  currency,  as  we  shall  presently  see,  had 
fallen  into  a  subordinate  rank ;  the  tariff  question,  after  a  furious 
party  struggle  in  which  all  considerations  of  political  science  were 
lost  sight  of,  seemed  to  have  been  settled ;  and  the  great  sectional 
controversy  began  to  fill  all  minds,  to  the  exclusion  of  every  other 
public  question.  A  few  text-books  appeared,  recasting  familiar 
material;  as,  for  example,  the  well-known  treatise  of  Professor 
Bowen  (1856),  in  which  he  threw  into  connected  form  a  long  series 
of  articles  and  lectures  produced  by  him  in  the  preceding  ten 
years,  and  Bascom's  convenient  rhiirn^  oi  economic  theory  (1859). 
To  these  we  must  add  Stephen  Colwell's  work  on  "  The  Ways  and 
Means  of  Payment"  (1859),  the  production  of  an  author  who  had 
few  equals  as  regards  his  acquaintance  with  economic  literature, 


ECONOMIC   SCIENCE   IN    AMERICA  1 3 

but  who  in  this,  his  chief  work,  appears  to  have  been  led  into 
unprofitable  subtleties,  which  have  failed  to  influence  appreciably 
the  opinions  or  studies  of  others.  Beyond  these  works,  however, 
—  and  omitting  for  the  present  a  writer  whom  we  must  notice 
more  at  length  further  on,  —  our  literature  now  has  little  to  show 
in  this  department  except  pamphlets  and  occasional  essays  of 
limited  interest,  for  the  years  in  which  the  wonderful  phenomena 
of  the  California  discoveries  were  occurring  in  our  own  country. 

In  the  period  which  includes  and  follows  the  war  we  have  a  few 
works  like  that  of  the  late  Amasa  Walker  (1866),  with  its  earnest 
but  not  always  conclusive  discussions  of  currency,  and  the  vigorous 
treatise  by  Professor  Perry  (1866),  —  both  designed  for  use  as 
manuals,  and  claiming  but  little  attention  as  statements  of  original 
thought.  In  general  it  must  be  said  of  the  last  ten  years,  that 
while  they  have  witnessed  a  marked  and  salutary  revival  of 
interest  in  economic  discussion,  the  most  absorbing  questions 
which  have  caused  this  revival  have  been  quite  too  rudimentary  to 
lead  to  fresh  development  of  principle.  Whether  we  shall  have 
more  paper,  or  shall  return  to  specie,  are  questions  caUing  not  for 
research  so  much  as  for  skill  and  force  in  rhetorical  treatment, 
which  may  carry  axiomatic  truths  into  unwilling  or  otherwise  unre- 
ceptive  minds.  It  is  true  that  the  question  whether  our  fiscal 
policy  should  look  to  continued  protection  or  to  ultimate  freedom 
of  trade  involves  more  really  controversial  matter ;  but  this  has 
been  so  far  overshadowed  and  complicated  by  the  question  of 
currency,  that  it  neither  has  produced  nor  seems  to  us  likely 
to  produce  for  some  time  to  come  any  marked  originality  of 
investigation. 

It  might  perhaps  have  been  enough  for  our  purpose,  if,  instead 
of  passing  in  review  this  series  of  American  writers  on  political 
economy,  we  had  simply  called  attention  to  the  fact  that,  with  few 
exceptions,  the  works  produced  in  the  United  States  have  been 
prepared  as  text-books  by  authors  engaged  in  college  instruction, 
and  therefore  chiefly  interested  in  bringing  principles  previously 
worked  out  by  others  within  the  easy  comprehension  of  under- 
graduate students.  The  success  with  which  this  work  has  often 
been  done  and  its  value,  we  shall  not  question  ;  but  clearly  it  is 
not  by  such  means  that  discoveries  in  abstract  science  are  likely  to 
be  made  or  to  be  announced  to  the  world.     It  should  occasion  no 


14 


ESSAYS 


surprise,  therefore,  that  of  the  considerable  list  of  American 
writers  on  the  subject,  so  few  have  produced  any  impression  out 
of  our  own  country,  or  have  been  able  even  at  home  to  give  to  the 
study  any  strong  impulse.  Not  only  has  no  American  school  of 
writers  on  pohtical  economy  been  established,  if  we  except  that 
which  we  are  about  to  notice,  but  no  recognized  contribution  to  the 
development  of  the  science  can  be  pointed  out  in  any  way  com- 
parable to  those  made  by  the  French  writers,  or  to  those  which  the 
Germans  are  now  making. 

The  writer  to  whom  we  have  referred  as  offering  in  some 
respects  a  possible  exception  to  these  general  remarks  is  Mr. 
Henry  C.  Carey.  It  cannot  be  said  that  Mr.  Carey  has  not 
engaged  attention  outside  of  his  own  country,  for  his  works  have 
been  translated  and  circulated  in  nearly  every  important  language 
of  Europe,  and  Mr.  Mill  on  several  occasions  pays  him  the  dis- 
tinguished tribute  of  singling  him  out  in  an  especial  manner  from 
a  throng  of  opponents.  Nor  can  it  be  said  that  he  has  won  his 
place  by  following  others,  for  his  system  aims  at  nothing  less  than 
revolution  in  the  leading  doctrines  of  political  economy,  and  he 
certainly  bids  fair  to  stand  next  to  Malthus  and  Ricardo  as  a  pro- 
voker of  controversy.  This  exceptional  position  has  been  attained 
as  the  result  of  a  long  and  laborious  career  as  a  writer.  Mr. 
Carey's  first  publication,  in  which  he  appears  as  an  advocate  of 
free-trade,  with  an  economic  theory  based  on  a  new  doctrine  of 
value,  dates  from  1835.  His  denial  of  Ricardo's  doctrine  as  to  the 
law  of  production  from  land  and  his  conversion  to  the  theory  of 
protection  followed  a  dozen  years  later.  The  final  elaboration  of 
his  system  in  opposition  to  what  he  is  fond  of  calling  the  British 
school  appeared  ten  years  later  still,  in  1858  ;  and  hardly  a  year 
has  passed  since  without  some  addition  to  the  long  line  of  his 
works  on  this  class  of  subjects.  This  series  of  publications  has 
had  a  distinct  and  not  inconsiderable  effect.  Bastiat  not  only 
borrowed  Carey's  law  of  value  and  presented  it  in  a  brilliant  para- 
phrase, but  seems  to  show  Carey's  influence  throughout  his  eager 
search  for  harmonies  in  the  economic  world.  In  Germany,  where 
the  way  was  no  doubt  prepared  for  him  by  the  labors  of  Frederic 
List,  Mr.  Carey  has  found  a  large  class  of  readers,  whose  numbers 
are  explained  by  Dr.  Uiihring  of  Berlin,  the  most  active  German 
writer  of  this  school,  by  pointing  to  the  American  author's  early 


ECONOMIC    SCIENCE    IN    AMERICA  1 5 

sympathy  with  the  Germans  and  his  prediction  of  their  intellectual 
leadership  of  the  world  ;  although  a  more  substantial  ground  of 
explanation  might  be  found  in  his  more  than  German  readiness  to 
refer  to  the  coordinating  power  of  the  state,  as  a  specific  for 
social  or  economic  discords. 

But  while  we  may  admit  that  the  system  elaborated  by  our 
countryman  is  likely  to  be,  as  Diihring  says,  "a  ferment  of  the 
strongest  kind  "  in  the  discussions  of  this  generation,  we  must  not 
forget  that  to  lead  a  school  is  not  necessarily  making  a  contribu- 
tion to  the  science.  Not  much  of  Mr.  Carey's  work,  we  are  con- 
fident, will  be  found  wrought  into  the  political  economy  of  the 
future.  His  doctrine  of  value  gives  epigrammatic  form  to  some 
important  general  truths,  but  does  not  supersede  the  usual  con- 
ception of  value  as  the  ratio  of  exchange  or  purchasing  power  of 
commodities,  or  enable  us  to  dispense  with  the  use  of  that  con- 
ception in  dealing  with  a  wide  range  of  questions,  both  theoretical 
and  practical.  His  doctrine  as  to  the  law  of  production  from  land, 
which  is  presented  in  fundamental  contradiction  of  the  English 
school,  is  chiefly  a  statement  as  to  historical  development,  which 
does  not  touch  the  essential  point  of  Ricardo's  theory ;  and  while 
he  denies  the  whole  of  that  theory  and  the  law  of  Malthus  as  to 
increase  of  population,  his  reliance  upon  a  conjectured  physiologi- 
cal law  as  an  ultimate  limit  to  the  increase  of  numbers,  shows  the 
difficulty  which  he  has  found  in  avoiding  as  a  logical  conclusion 
the  tendency  to  increasing  pressure  upon  the  means  of  subsistence 
pointed  out  by  those  writers.  And  it  is  upon  his  speculations  as 
to  value,  production  from  land,  and  population  that,  as  we  appre- 
hend, his  claims  to  be  regarded  as  a  permanent  contributor  to  the 
science  would  be  rested,  —  not  upon  his  later  discussions  of  pro- 
tection, the  major  part  of  which  follows  from  the  three  lines  of 
speculation  just  named,  nor  upon  his  theorizing  as  to  money,  in 
which  his  priority  might  be  disputed  by  a  series  of  writers,  from 
John  Law  down.  That  Mr.  Carey,  by  his  ardent  attack,  compels 
a  wholesome  revision  of  positions  and  arguments  there  is  no  ques- 
tion ;  that  he  has  checked  some  incautious  generalizing  we  have 
no  doubt;  but  that  he  has  overturned  any  previously  accepted 
principle  of  leading  importance,  still  more  that  he  has  established 
any  new  and  valuable  principle  originated  by  himself,  is  a  claim 
which,  in  our  judgment,  cannot  be  made  good. 


I 6  ESSAYS 

In  thus  recognizing  Mr.  Carey's  position  as  a  writer  of  excep- 
tional importance,  we  are  confirmed  by  observing  that  he  is  the 
only  American  author  noticed  by  Dr.  Roscher  in  his  exhaustive 
"  History  of  National  Economy  in  Germany."  But  it  must  be 
admitted,  we  think,  that  Mr.  Carey's  following,  in  our  own 
country,  has  had  a  more  local  character  than  might  have  been 
expected  from  his  wide  reputation.  The  work  of  E.  Peshine 
Smith  (1868),  Dr.  William  Elder's  "Questions  of  the  Day" 
(1871),  and  Professor  Thompson's  "Social  Science"  (1875)  are 
representative,  not  only  of  the  views  of  his  school,  but  almost  of 
its  geographical  limits  in  the  United  States.  The  conclusion  at 
which  we  have  arrived,  however,  as  to  Mr.  Carey's  own  position 
with  respect  to  the  development  of  economic  science,  frees  us 
from  the  necessity  of  considering  more  particularly  those  writers 
who  have  followed  but  have  not  advanced  beyond  him.^ 

The  general  result  then  to  which,  as  we  believe,  a  sober  exami- 
nation of  the  case  must  lead  any  candid  inquirer,  is,  that  the 
United  States  have,  thus  far,  done  nothing  toward  developing 
the  theory  of  political  economy,  notwithstanding  their  vast  and 
immediate  interest  in  its  practical  applications.  It  is  not  an 
agreeable  duty  to  declare  a  conclusion  so  little  flattering  to 
patriotic  sentiment;  but  to  arrive  at  it  as  a  truth  forced  upon 
the  mind  by  the  history  of  economic  science  is  still  less  agreeable. 
And  what  explanation,  it  will  be  asked,  is  to  be  given  for  a  failure 
apparently  so  much  at  variance  with  what  our  material  condition, 
the  general  intelligence  of  our  people,  and  the  growth  of  intel- 
lectual activity  among  us,  might  lead  the  inquirer  to  expect .''  The 
answer  to  this  question  will  be  easier,  if  we  briefly  consider  the 
circumstances  under  which  one  of  the  leading  public  questions 
having  an  economic  bearing  has  been  discussed  and  acted  upon 
in  this  country. 

The  question  of  paper  currency,  when  it  first  came  before  the 
people  of  the  United  States  for  settlement  under  the  present  Con- 

^  It  is  impossible  to  make  any  serious  mention  of  Mr.  Greeley  as  a  writer  on  political 
economy,  although  his  name  is  sometimes  included  in  a  full  catalogue  of  Mr.  Carey's 
school.  And  we  have  not  included  the  name  of  Mr.  Colwell,  because,  while  he,  no  doubt, 
agreed  with  Mr.  Carey  in  many  points,  we  observe  that  in  a  note  to  the  translation  of 
List's  "National  System  of  Political  Economy,"  p.  335,  he  more  than  intimated  dissent 
from  Mr.  Carey's  theory  of  rent  ;  and  Mr.  Carey's  system,  with  that  theory  struck  out, 
w<juld  not  be  recognizable  by  its  author. 


ECONOMIC   SCIENCE   IN   AMERICA  17 

stitution,  in  1 790-1 791,  was  already  complicated  in  a  manner  which 
made  its  thorough  investigation  doubtful.  Whether  such  paper 
should  be  issued  at  all,  whether  it  should  be  regulated  by  the 
general  government  or  the  states,  and  whether  the  proposed 
national  bank  should  control  the  paper  issues  of  the  country,  or 
should  be  content  with  simply  pouring  its  own  into  the  general 
mass,  were  questions  the  decision  of  which  was  in  a  manner  fore- 
stalled by  the  existence  of  banks  of  issue  established  several  years 
before  under  state  authority,  and  not  easily  disturbed  by  the  new 
government.  And  the  approach  to  the  fundamental  question  as 
to  bank  paper  was  still  further  embarrassed  by  the  political  turn 
which  the  discussion  took  in  its  early  stages.  The  advocates  of  a 
liberal  construction  of  the  Constitution,  and  those  of  a  strict  con- 
struction, arrayed  their  forces  for  battle  over  this  question  as  soon 
as  it  appeared.  Nothing,  indeed,  could  be  more  natural ;  but 
nothing  could  be  more  unfortunate  for  the  proper  settlement  of 
an  economic  problem.  All  scientific  questions  were  made  subor- 
dinate to  the  political  question  at  the  outset.  The  party  who 
dreaded  to  see  the  natural  government  too  strong  were  committed 
in  advance,  in  opposition  to  a  measure  which  for  them  was  part 
of  a  general  political  system,  and  in  large  sections  of  the  country 
hostility  to  the  bank  became  hostility  to  banking.  And  the 
division  of  opinion  upon  this  line,  rather  than  upon  abstract 
principle,  was  promoted  by  the  supposed  opposition  of  interests 
between  the  commercial  states  and  the  agricultural.  Of  thirty- 
nine  votes  for  the  bill  chartering  the  first  Bank  of  the  United 
States,  all  but  six  were  from  states  north  of  the  Maryland  line ; 
of  the  twenty  votes  against  the  bill,  all  but  one  were  from  states 
south  of  that  line.  How  far  the  political  side  of  the  question  of 
banking  overshadowed  the  scientific  is  clear  from  the  manner  in 
which  it  was  discussed  by  Mr.  Jefferson,  from  whom  one  of  the 
great  parties  took  its  tone  for  years.  That  statesman's  treatment 
of  the  question  of  currency,  and,  indeed,  of  other  economic  ques- 
tions of  which  the  relations  happened  to  be  political,  would  to-day 
be  universally  recognized  as  beneath  the  level  of  both  his  intellect 
and  his  knowledge.  His  intense  democracy,  and  his  extreme 
dread  of  any  proposition  based  on  English  models  or  English 
opinions,  incapacitated  him  for  any  genuine  discussion  of  this 
subject  in  its  larger  aspects.     And  to  what  length  the   ignorant 


1 8  ESSAYS 

bigotry  of  many  of  his  followers  carried  the  hostility  to  banks, 
which  was  instinctive  with  him,  the  political  history  of  our  first 
half-century  amply  testifies. 

The  prudence  and  good  judgment  with  which  the  first  Bank 
of  the  United  States  was  conducted  are  now  seldom  questioned : 
and  the  real  service  which  it  rendered,  in  its  twenty  years  of 
existence,  toward  giving  a  stable  foundation  for  our  finances,  at  a 
time  when  the  state  banks  and  their  issues  were  in  actual  chaos, 
is  not  more  doubtful.  But  the  bank  owed  its  existence  to  the 
Federal  party,  and  with  the  downfall  of  that  party  the  renewal 
of  its  charter  became  impossible.  Late  in  the  War  of  1 812,  an 
empty  treasury  brought  the  government  of  the  day  to  the  support 
of  a  new  bank  charter,  as  an  expedient  of  the  moment.  Banks, 
said  Mr.  Webster,  in  sober  admonition,  cannot  give  the  means 
of  supporting  an  expensive  war.  "  They  are  useful  to  the  state 
in  their  proper  place  and  sphere,  but  they  are  not  sources  of 
national  income.  The  streams  of  revenue  must  flow  from  deeper 
fountains."  But  so  urgent  was  the  demand  for  a  bank,  on  grounds 
of  merely  temporary  policy,  that  Mr.  Madison,  who  had  opposed 
the  charter  of  the  first  Bank  of  the  United  States,  vetoed,  as 
dilatory,  one  bill  chartering  the  new  bank,  because  it  required 
the  institution  to  begin  on  the  basis  of  specie  payments.  Happily, 
the  return  of  peace  settled  this  weighty  question  for  us,  and  the 
second  Bank  of  the  United  States  was  chartered,  to  begin  as  a 
specie-paying  bank,  on  the  first  day  of  January,   18 17. 

But  whatever  influence  the  new  Bank  of  the  United  States 
might  have  had  in  directing  the  public  mind  to  broader  views 
of  the  question  of  currency,  had  it  been  left  to  itself  and  had  its 
management  continued  to  be  sound,  its  circumstances  did  not 
allow  such  influence  to  be  exerted  by  it.  Political  hostility  was 
excited  against  it,  and,  six  years  before  the  expiration  of  its 
charter,  war  was  formally  declared  against  it  by  President 
Jackson.  We,  of  the  present  generation,  are  in  some  respects 
losers  from  the  total  and  probably  final  disappearance  of  that 
personal  loyalty  to  great  leaders,  which  marked  our  poHtics  forty 
years  ago  and  gave  to  them  a  glow  of  generous  enthusiasm  ;  but 
in  some  respects  we  are  also  gainers.  The  overwhelming  in- 
dividuality of  one  man  is  not  likely  again  to  convert  a  high 
question  of  economic  policy  into  a  mere  struggle  between  "  Jack- 


ECONOMIC   SCIENCE   IN   AMERICA  19 

son  and  the  bank,"  in  which  the  rival  clamors  of  personal  ad- 
herents and  personal  foes  shall  drown  all  considerations  of 
scientific  or  political  principle.  Such,  however,  was  the  ignoble 
character  of  the  contest  which  led  to  the  final  overthrow  of  the 
second  Bank  of  the  United  States.  The  financial  revulsion  which 
followed  that  contest,  and  was  in  part  its  natural  consequence, 
established  for  years  in  the  minds  of  a  great  political  party  the 
notion, — it  could  hardly  be  called  an  opinion, — that  paper  cur- 
rency of  any  sort  is  sure  to  work  ruin.  Under  the  domination  of 
this  party  the  general  government  in  1846  made  specie  its  only 
currency,  and  left  the  paper,  the  currency  of  the  people  in  three- 
quarters  of  the  states,  to  take  care  of  itself.  That  this  measure  for 
the  protection  of  the  Treasury  was  judicious,  supposing  it  to  be 
settled  that  the  paper  was  to  remain  free  from  all  control,  few  are 
now  disposed  to  deny ;  but  it  involved  an  abdication  of  power 
over  the  part  of  the  circulation  which  was  of  immediate  importance 
to  the  mass  of  the  community,  and  a  confession  of  the  insolubility 
of  a  great  public  question,  which  hardly  has  its  parallel. 

The  effect  produced  on  our  statesmen  by  thus  drawing  a  line 
which  left  this  whole  subject  in  the  exclusive  province  of  state 
legislation,  was  disastrous.  From  1846  to  1862  the  study  or  dis- 
cussion of  currency  and  finance  formed  no  part  of  the  training  of 
men  for  national  politics.  In  the  legislatures  of  the  states 
questions  of  this  class  were  dealt  with  by  men  of  inferior  order, 
or  by  those  who  were  only  anxious  to  make  their  mark  and  go  up 
into  a  broader  field;  but  they  had  ceased  to  be  national  questions 
which  could  repay  the  political  aspirants  to  national  office  for  any 
considerable  expenditure  of  time  or  thought.  Congress  had 
nothing  to  do  with  the  currency,  except  to  settle  the  weight  and 
fineness  of  the  coin,  and  government  finance  resolved  itself  into 
paying  all  demands  in  gold  from  a  treasury  which  generally  over- 
flowed, and  borrowing  upon  easy  credit  in  an  exceptional  case  of 
difficulty.  It  is  not  surprising  that,  when  the  war  for  the  Union 
compelled  the  government  to  deal  comprehensively  and  at  short 
notice  with  questions  of  finance  and  currency  in  their  most 
threatening  form  and  on  a  gigantic  scale,  we  had  no  leading  man 
in  public  life  who  could  speak  upon  them  authoritatively  or  com- 
mand general  attention.  The  bald  confessions  of  unfamiliarity  with 
what  had  become  the  vital  topics  of  the  hour  are  a  humiliating 


20  ESSAYS 

part  of  the  record ;  but  what  other  outcome  from  our  public  his- 
tory was  possible?  We  need  not  characterize  in  detail  the  con- 
sequences of  this  misfortune.  Victory  came  in  season  to  avert 
the  ruin  with  which  the  gross  violation  of  the  plainest  economic 
principles  threatened  the  nation,  and  the  task  of  repairing  the 
mischief  and  returning  to  specie  was  set  before  us.  For  eight 
years,  however,  it  was  overshadowed  by  the  business  of  Southern 
reconstruction,  and  was  habitually  treated  by  men  in  public  life 
as  a  topic  of  the  second  order,  which  could  wait  for  settlement 
at  a  more  convenient  season,  and  as  to  which  perhaps  one  need 
not  yet  make  up  his  mind.  The  financial  catastrophe  of  1873 
suddenly  brought  the  currency  question  to  the  front,  as  one  which 
must  be  answered  if  we  would  secure  the  return  of  stable  pros- 
perity ;  and  the  number  of  men,  either  in  legislative  or  in  execu- 
tive position,  who  were  then  able  to  show  that  they  had  fairly 
investigated  it  and  thought  it  out  in  the  light  of  scientific  prin- 
ciples, might  almost  be  counted  upon  the  fingers.  The  discus- 
sions which  followed  showed  that  the  mass  of  public  men  were 
dealing  with  it,  either  with  the  audacity  of  unconscious  ignorance 
or  with  the  timidity  of  that  which  is  conscious.  The  published 
debates  exhibit  our  Congress  for  two  sessions  laboring  painfully 
with  sophisms  which  other  countries  disposed  of  half  a  century 
ago,  and  finally  resorting  to  action  which  fails  to  be  mischievous 
only  because  it  has  thus  far  been  nugatory.  The  majority  still 
drift  upon  the  sea  of  doubt,  without  compass  and  without  any 
directing  impulse  save  such  as  may  come  from  the  veering  gusts 
of  popular  feeling ;  and  it  is  with  this  as  the  prevailing  condition 
of  opinion  among  the  majority  of  our  most  conspicuous  leaders 
on  both  sides,  that  we  finish  the  first  century  of  our  national 
existence. 

But  that  our  statesmen  have  been  incapable  of  taking  any  con- 
sistent action  upon  the  currency  question,  and  that  every  material 
interest  is  thus  placed  at  the  mercy  of  chancCj  is  not,  to  our  mind, 
the  most  serious  evil  resulting  from  this  state  of  things.  What 
appears  to  us  most  threatening  is  the  sceptical  turn  thus  given  to 
opinion  among  the  mass  of  our  people.  What  is  the  ordinary 
voter  to  think  of  a  subject  which  he  himself  finds  dark,  and  as  to 
which  those  whose  opinion  he  is  apt  to  follow  either  talk  anti- 
quated nonsense  to  him,  or  tell  him  that  nothing  is  settled  ?     Add 


ECONOMIC   SCIENCE   IN   AMERICA  21 

to  this  the  fact  that  one-half  of  the  present  political  generation 
have  come  upon  the  stage  since  we  abandoned  specie,  and 
have  had  no  other  experience  to  enlighten  them,  and  we  cannot 
wonder  that  the  currency  seems  to  the  mass  a  subject  on  which 
mankind  have  learned  nothing,  and  that  the  plainest  proposition 
of  reason  confirmed  by  history  may  any  day  be  talked  about  as 
"an  open  question,"  The  scepticism  of  searching  inquiry  is  not 
to  be  feared ;  but  the  incredulity  of  ignorance  multiplies  tenfold 
the  difficulty  of  the  task  of  restoring  the  financial  health  of  the 
nation. 

In  the  case  of  the  currency  question,  then,  it  appears  that  the 
subject  from  the  first  came  before  our  public  men  in  a  form  which 
seemed  to  make  its  political  bearings  too  important  to  be  sub- 
ordinated to  any  scientific  treatment.  The  same  might  be  said  of 
the  tariff  discussion,  which,  apart  from  its  inevitable  complication 
with  individual  interests,  has  never  failed  also  to  present  itself  in 
such  sectional  or  party  relations  as  to  make  its  settlement  turn 
largely  upon  far  other  considerations  than  those  of  general  prin- 
ciple. Whether  this  complication  has  been  the  result  of  some 
untoward  chance,  or  has  come  from  the  errors  of  our  statesmen 
themselves,  we  need  not  now  inquire ;  in  either  case  the  effect  is 
the  same.  Under  our  form  of  government  these  two  questions  of 
currency  and  tariff  cover  most  of  the  space  within  which  those 
charged  with  national  affairs  have  been  called  upon  to  investigate 
and  apply  economic  laws.  No  doubt,  important  topics  lie  within  the 
domain  of  state  legislation  ;  but  there  the  adoption  of  any  general 
theory,  however  sound,  has  been  impracticable  from  the  nature  of 
the  case.  It  is  a  part  of  the  price  which  we  necessarily  pay  for 
the  advantages  of  our  federal  system,  that  under  it  questions  of 
essentially  general  interest,  such  as  those  of  taxation,  education,  or 
poor-relief,  are  classed  as  merely  local,  and  are  therefore  not  sub- 
ject to  any  one  controlling  authority.  With  the  two  great  ques- 
tions of  national  economy,  then,  prejudged  or  inextricably  bound 
up  with  other  issues,  it  is  hardly  surprising  that  our  statesmen 
should  have  neglected  the  investigation  of  this  subject,  so  that  it 
is  to-day  easier  to  find  well-read  economists  among  our  men  of 
business  than  among  public  men  of  equally  good  general  educa- 
tion, although  the  inducement  to  such  pursuits  should  not  properly 
be  any  stronger  in  one  case  than  in  the  other. 


22  ESSAYS 

It  is  necessary,  however,  to  look  deeper  than  this  for  the  reason 
of  the  general  sterility  of  American  thought  upon  this  subject,  and 
the  failure  of  our  scholars  as  well  as  statesmen  to  contribute  our 
share  in  the  progress  made  by  the  world.  For  the  explanation 
we  must  look  to  the  causes  which  have  made  the  progress  of  the 
United  States  so  slow  in  philosophy,  in  the  pure  mathematics, 
and  in  abstract  science  generally,  in  philology,  in  the  more  recon- 
dite historical  investigations,  and  in  the  higher  generalizations  in 
physics.  Our  position  as  a  nation  charged  with  the  business  of 
subduing  a  new  world,  and  the  rapid  material  development  which 
has  attended  our  success  in  this  work,  have  given  to  our  life  for 
the  greater  part  of  the  century  an  intensely  practical  aspect. 
Practical  objects,  and  pursuits  which  are  believed  to  be  practical, 
have  occupied  the  first  place,  almost  as  a  necessity  of  our  external 
conditions.  It  has  been  well  remarked  that  some  of  our  best 
achievements  in  natural  sciences  have  been  in  those  directions  in 
which  the  promise  of  some  material  gain  has  afforded  the  stimu- 
lus, —  as,  for  example,  in  economic  geology,  to  which  so  powerful 
an  impulse  has  been  given  by  our  eagerness  to  know  the  resources 
offered  by  our  vast  territory.  Under  such  an  influence  as  this  it 
is  but  natural  that  the  moral  sciences  should  develop  slowly.  Nor 
could  we  expect  that  among  these  sciences  political  economy 
should  outstrip  the  others.  Broad  as  are  its  applications  in  the 
actual  affairs  of  life,  it  is  mastered  and  fruitfully  studied  best  as  an 
abstract  inquiry.  The  thorough  student  soon  finds  that  it  is  nec- 
essarily an  investigation  as  to  the  direction  which  human  volitions 
will  take  under  given  conditions,  and  that  for  its  successful  prose- 
cution he  must  first  direct  his  attention  to  the  mind  itself,  finding 
in  the  complex  phenomena  of  society  the  test  but  not  the  grounds 
for  his  conclusions.  Especially  has  this  been  the  necessary  char- 
acter of  the  study  during  the  last  century,  while  the  work  to  be 
done  was  that  of  determining  the  fundamental  principles  of  the 
science.  Such  a  pursuit,  at  any  rate  in  the  stage  from  which  it 
has  hardly  yet  emerged,  must  needs  appear  remote  from  the  pres- 
ent interests  of  a  nation  like  ours,  and  could  not  offer  an  attractive 
field  for  scholars  under  the  influence  of  a  young  and  vigorous 
national  life.  Thus  it  has  happened  that  not  a  few  of  our  inquirers 
have  either  been  unwilling  to  recognize  this  essentially  abstract 
character  of  the  investigation,  and  so  have  vainly  sought  to  re- 


ECONOMIC   SCIENCE   IN   AMERICA  23 

model  the  science,  or  else  have  strained  its  conclusions  by  the 
attempt  to  give  them  a  practical  bearing  in  advance  of  what  their 
development  would  allow.  In  either  case  the  wrong  road  has 
been  taken,  and  the  result  has  been  failure  and  disappointment. 
Hence,  too,  the  occasional  aspirations  for  an  American  political 
economy,  or  for  a  peculiarly  national  economy  under  any  name, 
ending  in  nothing  but  fresh  proof  of  the  impossibility  of  stating 
the  apphcation  of  any  scientific  law  under  special  conditions, 
until  the  nature  of  the  law  has  first  been  thoroughly  investigated, 
abstraction  being  made  of  all  accidents  of  time,  place,  or  disturb- 
ing influences. 

Indeed,  the  strongly  practical  direction  given  to  every  pursuit 
in  American  life  has  not  only  served  to  turn  our  statesmen  and 
scholars  away  from  work  in  the  field  of  political  economy,  but 
has  also  given  a  marked  character  to  such  work  as  they  have 
done  in  that  field.  In  the  application  of  settled  or  accepted  prin- 
ciples to  special  questions,  particularly  to  questions  of  importance 
in  politics,  many  of  our  writers  have  shown  great  skill.  Examples 
of  this  kind  of  success  in  a  narrowed  field  of  definite  practical 
relations  may  be  found  in  the  writings  of  Hamilton  and  Gallatin 
already  referred  to,  in  Henry  Lee's  report  written  in  1827  for  the 
Boston  committee  in  opposition  to  an  increase  of  duties,  in  the 
valuable  reports  of  Mr.  Wells  on  the  revenue  system,  in  E.  B. 
Bigelow's  strong  presentation  of  the  protectionist  argument,  and 
in  Grosvenor's  apphcation  of  the  crucial  test,  "  Does  Protection 
Protect .''  "  It  is  hardly  too  much  to  say  that  our  best  work  is 
to  be  found  in  our  pamphlets  and  occasional  essays,  and  not  in 
our  systematic  treatises,  so  powerful  has  been  the  stimulus  of 
practical  objects,  and  so  weak  the  inducements  to  abstract  philo- 
sophical inquiry.  To  the  same  influence  must  we  ascribe  the 
exceptional  success  sometimes  attained  in  statistical  inquiry,  from 
the  famous  report  of  John  Quincy  Adams  in  182 1  on  weights  and 
measures,  to  some  important  discussions  by  Dr.  Jarvis,  and  the 
admirable  work  done  by  General  Walker  on  the  census  of  1870. 

The  fact  must  be  taken  into  account,  moreover,  that  deficiency 
in  our  comprehension  of  scientific  reasoning  and  conclusions  is 
perhaps  less  readily  realized  in  political  economy  than  in  any 
other  science.  That  its  vocabulary  is  drawn  from  the  language  of 
popular  discourse,  and  is  therefore  peculiarly  liable  to  equivocal 


24  ESSAYS 

use  and  consequent  vitiation  of  the  whole  process  of  reasoning, 
unless  strictly  guarded,  has  not  only  been  an  abundant  source  of 
misconception  and  error  among  economists  themselves,  but  causes 
those  who  are  unfamiliar  with  the  subject  to  think  that  they  have 
mastered  its  terms  long  before  they  can  fairly  claim  any  such 
mastery.  The  conceptions  with  which  political  economy  deals 
are  also  subjects  of  everyday  contemplation,  on  which  every  one 
must  needs  reason  more  or  less,  and  as  to  the  bearing  of  which 
in  their  broad  scientific  relations  self-deception  is  peculiarly  easy. 
The  senator  who  calmly  announced  a  couple  of  years  ago  that  he 
had  given  his  leisure  for  an  entire  fortnight  to  the  currency  ques- 
tion, and  had  thus  been  enabled  to  sound  its  depths,  presented, 
after  all,  only  an  egregious  type  of  the  difficulty  with  which  in 
this  subject  one  acquires  the  knowledge  that  he  knows  nothing. 
This  does  not  spring  from  any  peculiar  obscurity  to  be  found  in 
the  subject  itself,  but  from  the  fact  that  in  dealing  with  it  the 
mind  is  apt  to  begin  with  the  tendency  to  misapprehension  to 
which  we  have  referred,  which  must  first  be  overcome;  just  as 
the  Copernican  theory  had  to  make  its  way  against  the  supposed 
ability  of  every  man  to  determine  its  falsity  by  the  seeming  evi- 
dence of  his  own  eyes.  And  while  this  is  not  a  peculiarity  of  the 
study  of  political  economy  in  our  own  country  or  our  own  lan- 
guage, but  everywhere  impedes  its  progress,  it  is  easy  to  say  that 
among  a  people  who  are  predisposed  to  neglect,  or  to  examine 
only  superficially,  whatever  does  not  offer  directly  practical  re- 
sults, a  science  which  under  the  most  favorable  circumstances  is 
subject  to  such  embarrassment,  must  lend  itself  with  especial 
readiness  to  the  prevailing  disposition.  Americans  are  disposed 
to  neglect  the  higher  mathematics  as  unpractical ;  but  they  do  not 
imagine  that  they  understand  the  subject.  Political  economy  they 
are  disposed  to  neglect  for  the  same  reason,  and  all  the  more 
because  they  flatter  themselves  that  they  already  have  it  at 
command. 

The  failure  of  the  American  mind  to  aid  in  the  development 
of  political  economy  is  not  then  necessarily  the  result  of  any  lack 
of  original  adaptation,  but  a  natural  effect  of  our  environment. 
And  we  must  observe  that  while  material  conditions  have  thus  led 
to  the  neglect  of  the  science,  they  have  also  led  our  people,  schol- 
ars as  well  as  others,  into  some  serious  misconceptions  as  to  the 


ECONOMIC    SCIENCE    IN    AMERICA  2$ 

direct  bearing  of  economic  laws.  From  our  holding  the  position, 
unique  among  the  great  powers,  of  a  people  developing  a  rich 
and  virgin  territory,  the  conclusion  often  seems  to  be  drawn  that 
if  the  operation  of  such  laws  be  not  actually  suspended  in  the 
United  States,  they  can  at  any  rate  be  disregarded  with  compara- 
tive safety.  Few  men  outside  of  Congress  or  off  the  political 
stump  will  maintain  the  absurdity  that  for  a  new  country  like  ours 
there  is  a  different  set  of  such  laws  from  those  which  obtain  in 
the  Old  World;  but  there  is  an  unquestionably  great  amount  of 
mischief  done  by  the  knowledge  that  the  lusty  growth  of  the 
nation  will  repair  the  injuries  caused  by  economic  blunders. 
Whatever  follies  our  statesmen  commit,  the  bounty  of  nature  and 
the  rapid  increase  of  numbers  incident  to  this  stage  of  our  growth 
soon  cure  the  evil ;  its  traces  are  soon  overgrown,  and  we  seem 
to  ourselves  to  have  suffered  nothing.  "  Are  we  not  richer  and 
our  states  more  populous  than  ever .'' "  it  is  asked  ;  "  how  then 
can  we  be  said  to  have  lost .''  "  And  it  is  not  surprising  that  the 
sense  of  risk  to  be  incurred  by  the  mistakes  of  ignorance  should 
be  weakened,  when  it  is  found  by  experience  that  few  such  mis- 
takes can  bring  our  national  expansion  to  an  actual  stop.  "  Where 
the  concerns  of  a  nation  are  conducted  in  a  deep,  strong,  favor- 
able current  of  the  national  energies  and  impulses,"  writes  a 
critic  in  this  review  of  the  last  generation,  "  progress  may  be 
made,  notwithstanding  the  mismanagement  of  the  sails,  oars, 
and  rudder.  This  is  precisely  and  preeminently  the  case  in  the 
United  States,  where  the  spontaneous,  productive,  onward  ener- 
gies are  in  greater  activity  than  in  any  other  country."  The  idea 
thus  frankly  avowed,  that  the  management  of  our  resources  is  of 
little  account,  so  long  as  we  find  ourselves  sweeping  along  with 
the  current  of  growth,  has  been  for  years  the  habitual  consolation 
of  our  public  men,  if  not  an  article  of  their  faith.  That  it  easily 
leads  to  indifference  as  to  the  monitions  of  economic  law  is  suffi- 
ciently obvious. 

How  complete  our  disregard  of  economic  law  has  been,  and 
how  little  we  owe  our  brilliant  advance  in  wealth  and  power  to 
the  wisdom  with  which  we  have  used  our  fortunate  position,  may 
easily  be  seen.  The  manner  in  which  the  currency,  the  life-blood 
of  industrial  circulation,  has  from  the  first  been  left  practically 
to  shift  for  itself  has  already  been  noticed.      As  a  consequence 


26  ESSAYS 

there  is  no  evil  incident  to  a  vicious  currency,  from  the  inability 
to  procure  the  means  of  exchange  for  daily  transactions  on  the 
one  hand,  to  the  wildest  abuse  of  depreciated  paper  on  the  other, 
to  which  our  body  politic  has  not  been  subjected.  And  that  the 
vigor  of  youth  has  enabled  it  to  survive  such  disorders  and  even 
to  recover  its  thriving  condition  has  only  seemed  to  give  fresh 
encouragement  to  rash  experiments  on  its  endurance.  In  the 
matter  of  protection  to  manufactures  neither  protectionist  nor 
free-trader  would  be  willing  to  take  the  responsibility  for  the 
general  result ;  for  in  fact  neither  has  been  able  to  secure  adhe- 
rence to  his  system.  Six  radical  changes  of  our  customs  tariff, 
six  reversals  of  policy,  have  occurred  in  the  last  sixty  years.  The 
present  tariff,  dating  from  1861,  already  approaches  the  extreme 
of  longevity,  and,  if  we  may  judge  from  the  past,  must  soon  fol- 
low its  predecessors,  each  of  whom  once  appeared  as  strong  and 
as  firmly  established  as  itself.  In  these  successive  revolutions  we 
have  seen  industries  artificially  excited  to  a  premature  and  un- 
healthy activity,  and  we  have  seen  them  laid  waste  by  the 
withdrawal  of  the  stimulus.  Who  can  measure  the  misdirected 
labor,  the  destroyed  capital,  to  repair  which  we  have  fallen  back 
after  each  change  of  tariff  upon  those  natural  resources  which  no 
folly  of  management  could  exhaust !  If  we  turn  from  the  tariff 
to  our  internal  taxation,  where  the  adoption  of  sound  principles 
has  rarely  been  embarrassed  by  sectional  or  political  considera- 
tions, the  state  of  things  is  still  more  extraordinary.  Down  to  the 
year  1861  the  United  States  appear  to  have  learned  nothing  as  to 
taxation.  Their  burdens  were  generally  too  Hght  to  cause  serious 
uneasiness,  except  in  some  cities,  and  the  average  legislature  is 
tolerably  well  steeled  against  the  complaints  of  city  interests. 
Since  the  year  1861  the  rapid  increase  of  taxes  in  every  form 
has  attracted  the  attention  of  our  people,  but  they  are  not  yet 
sensible  that  their  methods  of  taxation  are  antiquated  and  the 
machinery  inefficient,  that  their  systems  lead  to  extraordinary 
inequalities,  and  often  rest  upon  theories  which  fail  of  being 
ridiculous  only  because  of  their  flagrant  injustice.  Ingenuity  in 
preventing  the  escape  of  any  taxable  person  or  thing  has  been 
carried  to  a  high  point ;  the  art  of  adjusting  the  burden  so  *that 
it  may  be  most  easily  borne  has  never  been  studied  by  any  state 
legislature  or  by  Congress.     That  our  people  have  been  able  to 


ECONOMIC   SCIENCE   IN  AMERICA  2/ 

endure  this  neglect  of  one  of  the  first  duties  of  good  government, 
is  due  solely  to  the  abundance  of  their  resources,  which  for  the 
present  are  able  to  withstand  the  effects  of  such  waste  by  taxa- 
tion as,  in  a  country  with  lower  profits,  would  be  a  serious  check 
upon  industry.  Here,  again,  we  rely  for  impunity  on  the  rude 
health  of  youth.  And  as  a  final  illustration  of  our  easy-going 
defiance  of  sound  principle,  we  may  cite  the  continuance  of  slav- 
ery as  the  industrial  system  of  the  Southern  states,  until  its  un- 
expected destruction  by  war.  Nothing  can  be  more  certain  than 
that  slavery  was  an  economic  blunder  of  the  first  magnitude.  It 
notoriously  stunted  the  social  development  of  the  communities 
where  it  existed,  checked  all  tendency  to  diversification  of  em- 
ployments by  discouraging  all  pursuits  except  those  least  ad- 
vanced, and  craved,  for  its  successful  working,  constant  transfer 
of  its  exhausting  cultivation  to  fresh  soil.  Leaving  out  of  view 
its  moral  aspect,  there  can  be  no  doubt  that  slavery,  economically 
considered,  was  the  most  efficient  system  yet  seen  for  simply 
taking  the  cream  from  productive  powers  which  under  wise 
management  are  of  unlimited  duration.  What  this  perseverance 
in  a  wasteful  use  of  our  resources  has  cost  us,  directly  and  indi- 
rectly, may  be  partly  seen  by  comparing  the  splendid  natural 
advantages  of  the  Southern  states  with  their  present  impoverished 
condition. 

It  may  doubtless  be  said  that  we  are  not  the  only  people 
who  in  the  past  century  have  committed  errors  of  this  kind  and 
on  a  great  scale.  But  we  are  the  only  people  who  with  a  light 
heart  have  trusted  to  the  energy  of  growth  to  insure  us  against 
the  effects  of  present  mistake,  and  have  therefore  steadily  neg- 
lected to  cultivate  one  of  the  most  important  branches  of  the 
science  of  government.  As  a  consequence,  we  find  ourselves 
to-day  absolutely  incapable  of  following  out,  for  example,  such  a 
firm  and  judicious  course  of  management  as  that  by  which  France 
is  reestablishing  her  finances  on  a  solid  basis,  after  a  calamity 
in  which  all  but  the  name  of  the  French  nation  seemed  to  have 
disappeared.  Not  forced  like  others  to  count  closely  with  our 
resources,  we  have  in  effect  forgotten  how  to  count  with  them  at 
all,  and  are  every  day  confessing  our  inability  to  deal  with  a  prac- 
tical problem,  which  has  been  promptly  answered  by  others,  far 
less  favored,  either  in  material  or  political  conditions,  than  our- 


28  ESSAYS 

selves.  That  under  such  circumstances  we  should  have  added 
nothing  to  the  world's  knowledge  of  political  economy  is  not 
surprising.  The  surroundings  have  not  been  incompatible  with 
the  prosecution  of  such  a  study,  but  they  have  not  been  such  as 
to  promote  it.  For  that  purpose  something  more  is  needed  than 
the  mere  presence  of  great  resources  and  of  rapidly  increasing 
wealth.  The  profound  significance  of  the  investigation  as  bear- 
ing upon  the  right  use  of  resources  must  be  realized,  as  it  has  not 
been  among  us,  before  we  can  expect  that  it  will  be  pursued  with 
much  effect.  Elsewhere  this  lesson  has  been  impressed  upon 
statesmen  and  scholars  by  the  sternness  of  nature  or  the  approach 
to  the  limits  of  her  bounty,  or  by  the  necessity  of  dealing  with 
the  consequences  of  generations  of  misrule.  But  it  is  a  lesson 
no  more  easily  learned  by  a  nation  in  the  full  luxuriance  and 
strength  of  its  early  growth,  than  is  that  of  obedience  to  the  laws 
of  physical  health  in  the  first  flush  of  youth. 

As  the  result  of  our  failure  to  reckon  closely  with  forces  which 
will  finally  assert  their  presence,  we  find  ourselves,  at  the  close  of 
our  first  century,  falling  manifestly  short  of  the  development  to 
which  our  exuberant  vitality  might  easily  have  carried  us.  In 
every  case  it  was  with  seeming  impunity  that  we  offended  against 
the  laws  of  our  well-being ;  but  as  the  consequence  of  the  whole, 
our  statisticians  are  now  accounting  for  missing  millions  of  popu- 
lation, and  for  the  slackening  of  the  growth  of  wealth.  The  youth 
to  which  we  owe  our  power  of  ready  recovery  from  the  effects  of 
all  transgressions  is  also  passing  away,  and  it  is  with  a  sort  of 
angry  surprise  that  our  people  note  their  increasing  sensitiveness 
to  the  penalties  with  which  economic  error  is  visited.  This  leads 
us  to  the  remark,  in  conclusion,  that  most  of  the  conditions  to 
which  we  have  ascribed  the  failure  of  the  United  States  to  con- 
tribute to  the  progress  of  political  economy,  being  incident  to  the 
earUer  stages  of  national  life,  may  henceforth  be  expected  to  act 
with  diminishing  force.  The  period  of  the  most  rapid  develop- 
ment of  wealth  once  passed,  we  may  expect  the  practical  pursuits 
of  life,  or  those  which  now  seem  to  be  such,  to  become  less  absorb- 
ing, and  the  tendency  to  enter  upon  deeper  and  more  abstract  inves- 
tigations to  strengthen.  Already  in  our  older  states,  which  are 
farthest  removed  from  the  special  conditions  which  characterize 
the  United  States  as  a  whole,  we  may  trace  the  effects  of  this 


ECONOMIC   SCIENCE   IN   AMERICA  29 

tendency  in  their  increased  devotion  to  sound  learning  and  the  arts 
for  which  the  newer  states,  still  in  the  hurry  of  swift  growth,  seem 
to  have  little  leisure.  As  this  movement  strengthens,  we  may 
expect  to  see  the  moral  sciences  generally  rising  towards  that  pro- 
portionate development  with  respect  to  physical  science  which 
obtains  in  older  countries,  and  among  the  moral  sciences  poHtical 
economy  advancing  at  least  as  rapidly  as  any.  To  this  we  shall  be 
driven  by  material  considerations  as  powerful  as  those  which  have 
thus  far  restrained  our  progress  in  this  subject.  As  our  condition 
approaches  more  and  more  to  that  of  old  countries,  our  ability  to 
rely  upon  the  increasing  abundance  of  our  resources  to  cure  all 
mistakes  will  disappear,  and  the  mistakes  themselves  will  become 
obviously  costly  and  formidable.  In  our  case,  indeed,  they  may 
easily  become  more  formidable  in  their  consequences  than  else- 
where ;  for  in  the  coming  century  an  economic  blunder  in  the 
United  States  will  be  a  blunder  on  a  far  more  portentous  scale 
than  those  of  the  past,  and  will  work  out  its  consequences  among 
political  elements  which  will  admit  of  no  trifling.  Already  our 
public  men  are  appalled  by  the  responsibility  of  answering  such  a 
question  as  is  set  them  by  the  currency.  But  in  such  a  country  as 
we  may  reasonably  believe  this  will  be  fifty  years  hence,  and  with 
the  dangerous  forces  now  growing  within  our  democracy  fairly 
developed,  such  a  question  will  be  for  the  men  or  the  party  to 
whom  it  is  offered  for  answer  a  very  Sphinx's  riddle,  and  failure 
to  solve  it  will  mean  political  death.  It  will  then  no  longer  be 
possible  for  statesmen  or  scholars  to  ignore  or  neglect  those  eco- 
nomic laws  which  determine  the  consequences  of  our  actions.  The 
same  unfailing  operation  of  historical  causes,  which  in  other 
countries  has  led  to  every  great  step  yet  made  in  the  progress  of 
economic  thought,  will  produce  its  effect  here.  This  action  may 
be  hastened  by  the  shock  of  some  crisis  in  national  affairs ;  but  if 
not,  the  same  result  must  come  in  the  fulness  of  time.  The  regu- 
lar course  of  our  development  must,  at  a  point  not  far  distant,  dis- 
close to  us  an  imperious  necessity  for  investigating  the  laws  of 
material  wealth  ;  and  that  point  being  reached,  we  may  confidently 
expect  that  the  United  States  will  no  longer  fail  to  contribute  their 
due  share  to  the  advancement  of  this  branch  of  knowledsre. 


THE   REACTION    IN    POLITICAL   ECONOMY  ^ 

Sixteen  years  ago,  Professor  Cairnes  was  guided,  in  choosing 
the  subject  for  his  opening  lecture  at  University  College,  London, 
by  seeing  the  signs  of  a  belief  among  the  educated  public  that 
"  political  economy  had  ceased  to  be  a  fruitful  speculation."  Six 
years  later,  it  was  noted  that  in  the  speeches  at  the  Adam  Smith 
Centennial,  celebrated  by  the  English  Political  Economy  Club, 
there  were  indications  that  a  similar  sense  of  frustration  and  of 
limited  hope  as  to  the  future  had  made  its  way  even  among  econ- 
omists, and  this  at  the  traditional  centre  of  the  EngUsh  school. 
And  a  few  years  more  have  now  brought  into  full  activity  what  is 
variously  described  as  a  reaction  or  a  revolution,  in  which  a  deter- 
mined body  of  dissentients  from  the  old  political  economy  are 
striving,  in  every  leading  country,  for  some  sort  of  reorganization 
of  the  science  and  its  method,  upon  principles  rather  vaguely 
defined,  but  generally  declared  to  be  in  peculiar  harmony  with 
those  which  have  given  new  life  to  almost  every  other  branch  of 
learned  investigation. 

To  the  present  writer,  this  movement  appears  to  be  no  revolu- 
tion, but  a  natural  reaction,  probably  salutary,  and  destined  to 
promote  ultimately  a  rapid  but  still  orderly  development  of  the 
science,  upon  the  lines  laid  down  by  the  great  masters  of  what  is 
called  the  deductive  school.  The  real  import  of  the  movement 
appears  to  him  to  be  often  misconceived,  partly  from  a  negligent 
consideration  of  the  scope  and  proper  limitation  of  the  old  eco- 
nomics, and  partly  from  failure  to  observe  the  course  pursued  by 
the  greatest  masters  of  the  new.  It  is  proposed  in  the  present 
article,  therefore,  to  review  briefly  the  position  held  by  the  deduc- 
tive school,  to  consider  some  of  the  shortcomings  by  which  the 
way  for  reaction  has  been  made  easy,  and  to  show  what  appear  to 
be  the  characteristic  tendencies  and  real  drift  of  the  new  move- 

1  Quarterly  Journal  of  Economics,  October,  1886. 


THE   REACTION    IN    POLITICAL   ECONOMY  31 

ment.  In  doing  this,  ground  must  be  traversed  which  is  so  famil- 
iar to  many  readers,  that  nothing  but  the  frequent  and  sometimes 
apparently  studied  neglect  of  its  existence  can  be  the  writer's 
sufficient  apology. 

Little  space  need  be  given  to  the  formal  description  of  the 
method  used  by  what  will  be  called  here  the  deductive  school. 
The  authentic  statement  of  that  method  is  found  in  Mill's  "  Logic," 
in  the  concluding  paper  in  his  "Essays  on  Some  Unsettled  Ques- 
tions," and  also  in  Cairnes's  "  Character  and  Logical  Method  of 
Political  Economy."  As  stated  by  these  consistent  followers  of  the 
Ricardian  doctrine  and  conscious  preservers  of  its  continuity  of 
development,  the  method  starts  from  a  few  simple  premises,  collected 
by  observation  of  the  nature  of  man  and  of  his  environment,  draws 
from  these  premises  a  series  of  logical  conclusions,  verifies  these 
conclusions  by  fresh  observation  and  comparison,  and  thus  ascer- 
tains certain  relations  of  cause  and  effect,  which  are  termed  laws. 
As  an  example  of  the  application  of  this  method,  to  be  considered 
a  little  more  in  detail,  Mill's  "  Principles  of  Political  Economy  "  will 
be  taken,  not  only  as  the  most  convenient,  but  because  it  presents 
the  full  and  rounded  statement  of  a  system  of  leading  doctrines, 
partly  thought  out  in  the  "  Wealth  of  Nations,"  and  then  given  in  the 
rough,  with  little  effort  for  orderly  statement,  in  Ricardo's  writings. 

Mill  has  undertaken  to  investigate  the  production  and  distribu- 
tion of  wealth,  or,  in  other  words,  the  nature  and  the  results  of  the 
efforts,  which  it  may  be  assumed  that  men  living  in  civilized 
society  will  make,  to  provide  the  material  goods  by  which  the 
satisfaction  both  of  physical  and  of  mental  wants  is  in  large  meas- 
ure secured.  These  efforts,  he  takes  it  for  granted,  will  be  made 
by  preference  along  the  lines  of  least  resistance.  They  will  be 
made  also  under  the  conditions  of  a  natural  tendency  to  increase  of 
numbers,  and  of  the  application  of  labor  to  natural  agents,  which, 
when  pushed  beyond  a  certain  point,  no  longer  yield  a  proportional 
increase  of  returns.  These  data  Mill  finds  sufficient  for  the  estab- 
lishment of  a  considerable  body  of  general  propositions  as  to  the 
use  of  labor  and  capital  in  production. 

But,  for  the  investigation  of  the  laws  of  distribution,  it  becomes 
necessary  to  have  further  data  respecting  the  organization  and 
methods  of  the  society  in  which  the  distribution  takes  place.  It  is 
true  that  "whatever  mankind  produce  must  be  produced  in  the 


2>2 


ESSAYS 


modes  and  under  the  conditions  imposed  by  the  constitution  of 
external  things,  and  by  the  inherent  properties  of  their  own  bodily 
and  mental  structure"  ;  and  so  a  great  body  of  truths  as  to  pro- 
duction are  as  applicable  in  a  communistic  Utopia  as  in  the  United 
States  or  Great  Britain.  But,  in  dealing  with  distribution,  some- 
thing must  be  premised  as  to  the  ownership  of  the  natural  agents 
and  of  the  goods  produced,  and  something  also  as  to  the  freedom 
with  which  goods  and  services  can  be  contracted  for  or  exchanged. 
Mill,  therefore,  writing  with  reference  to  modern  western  civiliza- 
tion and  for  modern  readers  of  the  western  nations,  assumes  at 
this  point,  as  further  premises,  the  private  ownership  of  property, 
both  real  and  personal,  and  the  existence  of  a  free  competition. 
These  assumptions  import  no  judgment  as  to  the  necessity  or  the 
special  excellence  of  the  conditions  assumed,  nor  does  Mill  ignore 
either  the  possible  advantages  of  other  conditions,  or  the  fact  that 
they  may  exist.  His  assumption  as  to  private  property  is  followed 
by  a  digression  as  to  other  systems,  applicable  to  property  in  gen- 
eral or  to  real  property  in  particular,  in  which  the  opinions 
expressed  by  the  writer  as  to  some  fundamental  arrangements  of 
the  society  around  him  are  generally  thought  to  be  heterodox. 
His  assumption  as  to  competition  is  made  with  a  full  recognition 
of  the  fact  that,  even  where  competition  finds  the  fewest  obstacles, 
its  effects  are  often  greatly  modified  and  limited  by  the  prevailing 
habits  of  the  community ;  and  here  again  follows  a  digression, 
filling  several  chapters,  in  which  are  considered  a  variety  of  social 
conditions,  ranging  from  slavery  to  cottier  tenancy,  under  which 
competition  cannot  be  said  to  act.  Plainly,  it  is  only  as  an 
observed  fact,  general  enough  to  give  shape  to  the  mass  of  eco- 
nomic relations  in  the  western  nations,  that  the  existence  of  private 
property  is  assumed  ;  and  it  is  in  the  modern  tendency  of  compe- 
tition to  overcome  the  resistance  both  of  institutions  and  of  custom, 
and  to  be  the  prevailing  rule  of  dealing,  that  Mill  finds  his  warrant 
for  assuming  its  free  action  as  a  premise  for  reasoning  upon  dis- 
tribution. The  warning,  however,  that  competition  in  any  given 
case  acts,  as  it  were,  in  a  resisting  medium  of  greater  or  less 
density,  and  that  conclusions  based  upon  its  possible  maximum  of 
effect  are  to  be  modified /;v  ;r  7iata,  is  given  by  Mill,  not  once  for 
all  and  to  be  forgotten  either  by  writer  or  reader,  but  repeatedly, 
and  is  enforced  at  several  stacfcs  of  his  discussion. 


THE    REACTION    IN    POLITICAL   ECONOMY  33 

It  is  obvious  that  the  process  thus  described  is  a  study  of  the 
action  of  a  certain  force  under  given  conditions,  —  the  force  being 
selected  for  consideration,  not  as  being  the  sole  spring  of  action, 
but  as  one  generally  found  in  operation,  and  the  conditions  being 
such  as  are  usually  presented  by  modern  civilized  life.  The  pro- 
cess is  understood  to  be  thus  strictly  limited,  because  of  the  com- 
plexity of  the  motives  and  external  conditions  by  which  the 
production  and  distribution  of  wealth  are  affected.  A  single  great 
force  is  studied  by  itself,  because  this  is  believed  to  be  a  necessary 
preliminary  to  the  study  of  its  action  when  in  composition  with  the 
other  forces,  which,  although  of  secondary  importance  as  regards 
the  purpose  in  hand,  are,  nevertheless,  to  be  finally  included  in 
any  complete  investigation ;  and  this  isolation  of  the  force  first 
brought  under  examination  is  affected  by  hypothesis,  because  it 
cannot  be  effected  by  experiment,  as  in  physical  science.  Even  if 
we  suppose,  then,  that  some  other  force  or  motive  might  better 
have  been  selected  as  the  primary  object  of  study,  —  a  supposition 
warranted  by  the  conclusions  of  few  economists  of  any  school,  — 
it  would  still  remain  true  that  the  adoption  of  this  process  by  Mill 
is  a  strictly  logical  and  philosophical  method  of  arriving  at  impor- 
tant truths  affecting  a  great  department  of  human  activity.  Even 
if  other  methods  should  be  found,  more  rapid  or  far-reaching,  this 
would  still  be  a  scientifically  defensible  method  of  investigating 
the  action  of  economic  motives. 

This  method  is  said,  however,  to  be  indifferent  to  facts,  and, 
since  it  proceeds  upon  assumed  premises,  to  lead  to  the  evolution 
of  a  system  having  no  necessary  relation  to  the  external  world. 
Fairly  considered,  the  verification  of  results  reached  by  deductive 
reasoning  should  call  for  as  patient  collection  and  as  conscientious 
sifting  of  facts  as  any  other  use  of  observation.  But,  beyond  this, 
it  is  from  facts  that  the  suggestion  must  come  of  all  such  secondary 
influences  or  forces,  which  modify  the  action  of  the  primary  force 
investigated  by  the  economist ;  and  it  is  from  the  study  of  facts  and 
of  their  evidence  as  to  the  conditions  under  which  such  secondary 
influences  act,  that  we  must  proceed  in  determining  the  law  of  their 
action.  For  example,  Ricardo's  law  of  rent  is  a  deduction  from 
simple  premises  respecting  the  effort  to  employ  capital  with  the 
best  profit  on  lands  differing  in  productiveness  or  convenience. 
But,  in  reasoning   upon  rent  or  the  value  of   land  in  any  given 


34 


ESSAYS 


country,  Ricardo's  law  is  found  to  give  the  clew,  indeed,  —  but  a 
clew  to  be  followed  through  special  conditions,  often  of  wonderful 
variety.  To  the  originally  simple  case  of  economic  rent  are  added 
the  modifications  arising  from  customs  of  deahng  between  owner 
and  occupant,  from  the  speculative  holding  of  land,  or  from  changes 
in  its  uses,  or  revolutions  in  transportation.  And  these  new  con- 
ditions are  the  necessary  objects  of  close  study,  as  supplying  the 
material  for  fresh  reasoning,  if  the  economist,  following  the  deduc- 
tive method,  seeks  to  advance  his  knowledge  of  cause  and  effect  — 
that  is,  his  knowledge  of  economic  law  —  beyond  the  elementary 
state.  So  far  from  facts  being  a  matter  of  indifference  or  being 
of  only  occasional  use,  in  the  deductive  method,  every  one  of  the 
leading  writers  —  Adam  Smith,  Malthus,  Ricardo,  the  younger  Mill, 
Senior,  McCulloch,  and  Cairnes  —  either  had  special  occasion  for 
minute  acquaintance  with  important  classes  of  economic  facts  much 
reasoned  upon  by  him,  or  shows  the  proof  of  special  study  of  such 
facts. 

The  further  charge,  that  the  results  arrived  at  by  the  deductive 
method  have  no  necessary  relation  to  the  external  world,  no  doubt 
has  so  much  foundation  as  this, — that  the  truths  arrived  at  are 
conditional  truths.  Deduced  from  certain  premises  by  a  logical 
process,  they  are  undeniable  ;  but,  still,  they  declare  only  the  effects 
of  causes  acting  under  specified  conditions.  So  far  from  being  of 
universal  application,  they  are  limited  by  their  own  complete  logi- 
cal statement  to  cases  where  the  conditions  originally  premised  are 
present,  and  not  controlled  by  any  others.  It  is  even  conceivable 
that  no  exact  parallel  to  the  hypothetical  case  should  ever  present 
itself,  and  afford  the  simple  and  perfect  realization  in  practice  of 
an  economic  truth.  To  use  the  familiar  illustration,  in  every 
actual  case  there  might  be  some  allowance  needed  for  perturbing 
forces  or  friction.  Still,  few  will  deny  that  truths,  even  in  this 
abstract  form,  if  rightly  apprehended  and  used,  must  be  of  the 
highest  service  in  helping  to  understand  the  march  of  human 
affairs. 

It  is  a  necessary  consequence  of  the  conditional  nature  of  the 
truths  arrived  at  by  the  deductive  process  that  their  use  as  guides 
of  conduct  is  subject  to  strict  limitations.  No  doubt,  the  tempta- 
tion to  treat  abstract  truths  as  universally  applicable,  without 
qualification,    has   often    proved   irresistible.      Still,    the   warning 


THE   REACTION    IN    POLITICAL   ECONOMY  35 

against  this  misuse  of  them  is  found  in  their  statement.  "  The 
economist's  conclusions,"  says  Senior,  "  do  not  authorize  him  in 
adding  a  syllable  of  advice,"  —  a  negation  which,  it  must  be  added, 
proved  offensive  to  McCulloch,  who  was  little  disposed  to  let  any 
opportunity  for  profitable  exhortation  pass  unimproved.  Plainly, 
Senior,  in  theory  as  well  as  in  his  own  public  service,  regarded 
the  results  of  the  economist  as  contributory  to  practical  judgments, 
but  seldom  as  sufficient  therefor  in  themselves.  Taken  in  connec- 
tion with  the  special  facts  which  surround  any  question,  —  the 
facts  historical,  social,  psychological,  or  physical,  which  create 
special  conditions,  —  economic  truths  are  theoretically  as  essential 
as  any  others  for  the  formation  of  sound  opinions,  and  are  also, 
taken  by  themselves,  as  insufficient.  This  limitation  of  their 
practical  effect  as  supplying  a  part,  but  only  a  part,  of  the  grounds 
of  action,  is  of  special  importance,  of  course,  in  their  bearing  upon 
legislation.  Economic  laws,  in  strictness,  deal  with  wealth  ;  but 
the  object  of  legislation  is  welfare.  Or,  as  Adam  Smith  says,  when 
dealing  with  a  special  case,  "  Defence  is  of  much  more  importance 
than  opulence."  Without  multiplying  citations  upon  this  point,  it 
is  enough  to  recall  Cairnes's  declaration,  often  urged  by  him  in 
different  forms,  that,  "  there  are  few  practical  problems  which  do 
not  present  other  aspects  than  the  purely  economical,  —  pohtical, 
moral,  educational,  artistic  aspects ;  and  these  may  involve  con- 
sequences so  weighty  as  to  turn  the  scale  against  purely  economic 
solutions." 

This  recognized  limitation  of  the  scope  of  economic  conclusions, 
as  applied  to  practical  affairs,  brings  to  view  what  is  sometimes 
indignantly  described  as  the  divorce  of  political  economy  from  all 
ethical  considerations.  The  economist,  it  is  charged,  carefully 
ignores  all  higher  purposes  and  duties,  that  he  may  devote  his 
thoughts  to  the  pursuit  of  wealth  alone.  But  need  it  be  ex- 
plained that,  in  this  alleged  divorce,  the  only  question  really  at 
issue  is  one  of  classification,  —  a  question  as  to  the  drawing  of 
a  line  for  purposes  of  nomenclature  between  several  fields  of 
thought,  all  of  which,  it  is  admitted,  must  be  traversed  before 
action  can  be  decided  upon }  When  the  economist  restricts  his 
discussion  to  something  less  than  the  sum  of  all  the  considerations 
of  right  and  expediency  which  must  weigh  in  questions  of  political 
action,  his  contribution  toward  the  final  decision   may  indeed  be 


36  ESSAYS 

pronounced  important  or  the  reverse,  according  to  the  judgment 
of  the  critic ;  but  there  is  as  httle  ground  for  the  moral  condemna- 
tion sometimes  fulminated,  as  when  one  investigator  declares  his 
field  to  be  physiology  and  not  therapeutics,  or  another  devotes 
himself  to  the  mechanical  and  chemical  properties  of  the  rocks, 
and  not  to  their  geological  relations.  It  is  only  when  the  economist 
undertakes  to  apply  his  conclusions  in  disregard  of  other  aspects 
of  the  political  or  social  questions  before  him,  and  treats  these 
questions  as  problems  in  political  economy  only,  that  there  is  room 
for  the  reprobation  of  his  neglect  of  ethical  considerations ;  and,  in 
this  case,  he  is  sinning  against  the  law  implied  in  his  own  method.^ 
Much  confusion  and  misplaced  censure,  however,  upon  other 
points  as  well  as  this,  might  easily  be  avoided,  by  keeping  in  mind 
more  carefully  the  necessary  distinction  between  a  science  and  its 
applications. 

But  it  is  unnecessary  to  carry  any  farther  this  review  of  the 
characteristics  of  the  deductive  method.  The  method  may  be 
imperfectly  applied  by  those  who  profess  to  use  it,  the  conclusions 
reached  by  its  means  may  be  misinterpreted ;  but  it  is  in  itself  a 
process  of  careful  investigation  of  causes  and  effects,  naturally 
tending  to  the  establishment  of  that  orderly  body  of  verified  truths 
which  is  called  a  science.  It  is,  in  short,  a  strictly  scientific 
method  of  approaching  our  great  set  of  problems  presented  by  the 
life  of  man  in  society.  Other  methods  of  approaching  the  same 
subject-matter  may  conceivably  be  used,  but  it  is  pure  arrogance 
to  claim  for  any  other  that  it  is  tJie  scientific  method. 

It  must  be  recognized  as  a  fact,  however,  that  political  economy, 
as  pursued  by  the  deductive  method,  has  seriously  disappointed 
the  hopes  which  formerly  centred  around  it ;  and  this  not  merely 
because  of  the  extravagance  of  the  hopes,  but  also  by  reason  of 
its  own  sterility  in  results.  To  the  present  writer,  this  state  of 
things  appears  to  be  the  consequence,  not  of  some  discovered  weak- 
ness or  insufficiency  of  the  method,  but  of  the  failure  of  economists 
to  pursue  the  path  on  which  they  had  entered.  For  this  failure,  the 
very  nature  of  the  body  of  doctrine,  which  was  early  established, 

'  A  strikitifj  instance  of  a  wide  range  of  consiticrations  taken  account  of  by  an 
economist,  when  engaged  as  a  legislator  in  the  discussion  of  a  grave  practical  question, 
is  presented  by  Mill's  speech  in  the  House  of  Commons,  17  May,  1866,  on  the  Tenure 
and  Improvement  of  Land  (Ireland)  Bill. 


THE    REACTION    IN    POLITICAL   ECONOMY 


37 


may  perhaps  afford  a  partial  explanation.  It  has  already  been 
said  that,  in  the  system  of  principles  stated  by  Mill,  —  and  this 
means  in  the  system  obscurely  suggested  by  Ricardo,  —  the  pri- 
mary object  of  study  is  a  single  great  force,  acting  under  given 
conditions.  Among  these  conditions  is  a  tendency  to  steady 
increase  of  resistance  as  society  advances,  resulting  from  the  laws 
of  population  and  of  production  from  land.  What  have  been 
called  the  dynamics  of  political  economy  must,  therefore,  with  the 
growth  of  a  community  and  in  any  given  state  of  the  arts,  develop 
a  gradually  slackened  movement,  pointing  to  an  ultimate  cessation 
of  advance  at  the  point  where  the  motive  force  shall  be  offset  by 
the  increased  resistance ;  that  is,  to  a  state  of  quiescence,  not 
necessarily  unfortunate,  but  still  demanding  some  new  impulse  as 
the  condition  either  of  further  advance  or  of  decline.  This  is 
the  theoretical  point,  —  far  off,  it  may  be,  and  postponed  by  every 
fresh  discovery  and  the  opening  of  new  resources,  but  still  con- 
ceivably attainable,  —  to  which  increasing  numbers  and  declining 
profits  point,  as  it  were,  by  converging  lines.  Now,  such  a  concep- 
tion, of  which  traces  may  be  found  in  Adam  Smith,  seems  in  a 
certain  sense  to  finish  the  task  of  economic  science.  The  move- 
ment of  human  society  has  been  forecast.  The  goal  toward  which 
the  great  constant  force  tends  is  ascertained.  What  remains,  it 
might  easily  be  asked,  except  to  elaborate  the  reasoning,  to  rivet 
the  logic,  and  to  present  the  elements  of  the  calculation  more 
clearly  .-*  It  seems  to  have  been  some  such  conception  as  this,  of 
a  science  completed  and  rounded  and  adequately  describing  the 
destined  movement  of  every  human  society  to  its  ultimate  stage, 
that  led  Lord  Sherbrooke,  then  Mr.  Robert  Lowe,  to  declare  in 
1876  that  the  work  of  political  economy  appeared  to  him  to  be 
about  finished.  And  many  a  younger  student,  who  has  admired 
the  logical  strength  and  symmetry  of  the  system,  has  wondered  at 
the  seeming  meagreness  of  its  content,  as  he  has  found  himself 
suddenly  confronted  by  what  might  be  mistaken  for  the  last  pos- 
sible deduction. 

That,  dealing  with  such  a  system,  economists  should  fail  to 
push  as  they  might  their  investigations  into  causes,  was,  no  doubt, 
all  the  more  natural  by  reason  of  the  oppressive  influence  of  the  few 
great  names  which  adorned  the  deductive  school  during  its  rise. 
And  yet  the  method  by  which  economic  science  should  be  carried 


38  ESSAYS 

into  regions  never  penetrated  by  Ricardo  was  simple.  It  was  only- 
necessary  to  draw  from  the  actual  observation  of  affairs  fresh 
premises  relating  to  forces  of  what  we  have  called  the  secondary 
order.  There  is  a  pregnant  sentence  in  Mill's  essay  on  definition, 
declaring  that,  in  order  to  make  political  economy  perfect  as  an 
abstract  science,  "the  combinations  of  circumstances  which  it 
assumes,  in  order  to  trace  their  effects,  should  embody  all  the 
circumstances  that  are  common  to  all  cases  whatever,  and  likewise 
all  the  circumstances  that  are  common  to  any  important  class  of 
cases."  In  other  words,  the  framing  and  insertion  of  new  premises, 
and  the  tracing  of  effects  in  the  ever  increasing  complexity  of  con- 
ditions necessary  in  order  to  reach  all  those  "  common  to  any  im- 
portant class  of  cases,"  were  the  natural  course  of  development. 
Upon  this  line  Mill  entered  when,  reasoning  from  the  impeded 
flow  of  labor  and  capital  from  one  country  to  another,  he  succeeded 
in  adding  to  Ricardo's  theory  of  international  trade  a  theory  of  in- 
ternational values.  Cairnes  also  took  the  same  course,  when  he 
extended  the  same  reasoning  to  the  cases  where  competition  is  im- 
perfect in  domestic  exchanges,  either  as  between  different  parts  of 
the  same  country,  or  as  between  different  industrial  strata  or  occu- 
pations in  a  given  community.  In  the  same  direction  of  fruitful 
development  were  the  inquiries  which  Cairnes  made  at  different 
stages  of  his  career,  as  to  the  unequal  measure  in  which  the  prices 
of  different  articles  respond  to  a  common  influence,  —  as,  e.g.,  to  a 
cheapened  supply  of  money,  which  is  usually  treated  as  affecting 
all  alike  and  simultaneously ;  and  other  examples  could  easily  be 
cited  from  the  same  suggestive  writer.^ 

Plainly,  the  system  of  political  economy,  as  elaborated  in  the 
earlier  part  of  this  century,  gave  unlimited  scope  for  investigation 
and  expansion  of  this  kind,  and  for  the  discovery  of  what  have 
been  called  "derivative  laws"  of  probable  interest  and  importance. 
The  very  fact  that,  as  already  noticed,  the  system  had  to  assume 
in  the  first  instance,  and  in  order  to  simpHfy  its  task,  that  compe- 
tition acts    uniformly,  shows  that  the  whole  field  of   distribution 

1  Trofessor  James  says  of  the  old  economy  that  it  satisfied  a  demand  for  "something 
perfect  in  its  way.  It  was  indeed  a  closed  circle,  but  it  had  consequently  no  line  of 
advance,"  To  go  on  with  Professor  James's  figure,  however,  the  deductions  from  simple 
premises  being  closed,  new  premises  afford  the  opportunity  for  new  circles,  of  wider  and 
wider  sweep,  limited  only  by  the  variety  of  human  interests  to  be  dealt  with.  See 
Science  Economic  Discussion,  p.  42. 


THE    REACTION    IN    POLITICAL    ECONOMY  39 

and  exchange  might  be  worked  over,  with  new  conditions  drawn 
from  observation,  and  with  the  promise  of  valuable  results.  Or, 
to  take  another  region  into  which  investigation  by  the  deductive 
method  might  well  have  been  carried,  —  that  suggested  by  the 
familiar  condition,  "in  a  given  state  of  the  arts."  The  improve- 
ment of  instruments,  processes,  and  institutions,  by  which  produc- 
tion is  aided  and  the  resistance  of  nature  is  offset,  is  ordinarily 
treated  by  the  economist  as  something  fortuitous,  —  to  be  allowed 
for  in  a  given  case,  no  doubt,  but  showing  no  stated  recurrence 
which  can  afford  a  basis  for  reasoning.  Ricardo  and  his  contem- 
poraries naturally  spent  but  little  effort  in  speculating  upon  indus- 
trial and  social  changes,  of  which  their  time  showed  only  the 
beginnings.  Mill,  writing  when  the  changes  had  become  revolu- 
tionary, saw  that  they  were  characteristic  of  the  century,  and  that 
no  term  could  be  set  to  their  extension.  Still,  in  the  greater  part 
of  his  treatise,  he  was  unable  to  do  more  than  refer  to  them  as 
transitory  "counteracting  influences,"  on  the  succession  of  which 
no  great  amount  of  reasoning  needs  to  rest.  It  is  clear,  however, 
that  these  influences,  although  in  one  sense  transitory,  are  for  our 
time  practically  constant.  Inventions,  the  opening  of  new  conti- 
nents, the  abolition  of  time  and  space,  the  economic  rejuvenation 
of  countries  by  social  and  political  reform,  follow  each  other  in  a 
long  line  and  in  a  certain  orderly  movement.  Reason  compels 
us  to  reject  the  vision  of  perpetual  advance  ;  but,  for  these  gener- 
ations of  the  world's  history  at  any  rate,  industrial  improvement, 
or  that  which  tends  in  the  same  direction,  is  not  an  accidental,  but, 
as  nearly  as  possible,  a  permanent  force,  acting  with  the  primary 
forces  of  which  the  economist  treats,  but  constantly  masking  and 
for  the  time,  perhaps,  reversing  their  effects.  Here,  then,  has 
been  offered  the  opportunity  for  the  economist  to  make  useful 
application  of  his  method,  for  investigating  the  movement  of 
society  in  the  ascending  part  of  its  orbit,  and  dealing  with  a  mass 
of  striking  phenomena,  far  too  complex  for  systematic  siudy  with- 
out the  working  hypothesis  already  in  his  hand. 

It  follows,  from  this  view  of  the  field  open  to  political  economy, 
as  defined  and  studied  by  the  deductive  school,  that  the  science, 
so  far  from  having  reached  the  end  of  its  work,  has  before  it  a 
task  which,  as  Cairnes  says,  is  never  to  be  completed,  "  so  long  as 
human  beings  continue  to  progress";  for  "the  main  facts  of  the 


40 


ESSAYS 


economist's  study  —  man  as  an  industrial  being,  man  as  organized 
in  society  —  are  ever  undergoing  change."  It  follows,  too,  that, 
while  the  connection  between  assumed  premises  and  the  logical 
conclusion  is  immutable,  so  much  of  the  economist's  conclusions  as 
are  based  on  conditions  peculiar  to  his  own  time  must  lose  a  part 
of  their  importance  as  years  pass.  To  this  extent,  we  may  easily 
agree  with  the  proposition  so  ably  supported  by  Dr.  Seligman,^ 
that  "the  economic  theories  of  any  generation  must  be  regarded 
primarily  as  the  outgrowth  of  the  peculiar  conditions  of  time, 
place,  and  nationality,"  and  that  "  no  particular  set  of  tenets  can 
arrogate  to  itself  the  claim  of  immutable  truth." 

It  must  be  added,  moreover,  that,  if  the  development  of  politi- 
cal economy  by  its  normal  course  had  been  pushed  by  the  deduc- 
tive school,  the  science  itself  would  have  been  held  closer  to 
modern  life  and  to  the  great  problems  which  demand  their 
answer  from  the  modern  world.  Bagehot  complains  that  the 
science  "  lies  rather  dead  in  the  public  mind,"  and  that  young  men 
do  not  feel  "that  it  matches  with  their  most  living  ideas."  This 
is  a  natural  result  of  the  omission  to  deal  adequately  and  systemati- 
cally with  existing  economic  relations,  in  an  age  which  is  chiefly 
characterized  by  the  multiplication  and  change  of  such  relations  ; 
and  it  seems  clear  that  the  position  which  the  deductive  political 
economy  held,  even  twenty  years  ago,  need  not  have  been  lost,  if 
its  followers  had  pursued  the  natural  course  of  widening  their 
discussion  of  economic  law,  by  drawing  steadily  from  the  fresh 
experience  of  the  day. 

What  has  happened  in  political  economy,  then,  is  a  singular 
instance  of  a  scientific  inquiry  stopped  short  in  its  path,  it  may  be 
by  the  timidity  —  at  any  rate,  by  the  failure  —  of  those  who  had 
it  in  charge.  In  such  a  case,  reaction  is  not  only  inevitable,  but 
is  probably  the  best  hope  of  renewed  activity  and  progress.  Even 
if  the  reactionary  movement  itself  should  be  misdirected  or  should 
run  to  excesses  of  its  own,  and  should  thus  finally  contribute  noth- 
ing directly,  the  chances  are  still  strong  that  it  will  be  the  stimulus 
of  thought  and  of  fresh  investigation ;  and,  from  such  revival, 
science,  pursued  by  sound  methods,  has  nothing  to  fear. 

The  reaction  in  political  economy  has  come  in  the  rapid  growth 
of  what  is  variously  known  as  the  German,  the  inductive,  or  the 

^  Science,  1 886,  p.  375. 


THE   REACTION   IN    POLITICAL   ECONOMY  41 

historical  school.^  No  one  of  these  terms  is  well  chosen.  The 
new  school  can  no  longer  be  called  German,  for  its  influence  is 
now  so  diffused  as  to  be  entirely  independent  of  the  place  of  its 
origin.  To  call  it  the  inductive  school,  as  is  suggested  by  a  natu- 
ral antithesis,  implies  some  radical  change  in  methods  of  reasoning, 
often  vaguely  asserted,  but  generally  disappearing  in  any  attempt 
at  precise  analysis.  Even  the  term  "  historical,"  which  it  will  be 
convenient  to  use  here,  seems  to  imply  some  peculiar  use  of  his- 
torical material  for  the  discovery  of  economic  truth,  as  distinguished 
from  its  verification  or  illustration,  —  a  use  not  to  be  detected  in 
the  leading  writers  of  the  new  school,  whose  pages  bristle  with  the 
results  of  hypothetical  reasoning. 

In  fact,  so  far  as  scientific  method  is  concerned,  it  may  be 
stated  positively,  that  the  leading  writers  of  the  new  school  do 
not  agree  in  rejecting  the  deductive  method,  nor  in  adopting  any 
other  method  inconsistent  with  this  or  ultimately  exclusive  of  it. 
Use  of  deduction  in  some  way  and  to  some  extent  is  admitted 
by  nearly  all,  and  is  no  doubt  logically  inseparable  from  the  pro- 
cess commonly  called  inductive.  Dr.  Ely,  no  moderate  supporter 
of  the  historical  school,  remarks  that  "the  term  inductive  is  to 
be  applied  to  those  writers  who  do  not  start  out  with  all  their 
premises  ready  made,  but  who  include  the  induction  of  premises 
within  the  scope  of  their  science,  and  proceed  to  use  these  prem- 
ises deductively."^  This  statement  would  no  doubt  bring  the 
greater  part  of  the  English  school  and  their  followers,  including 
the  leading  writers  upon  method,  within  the  fold  of  the  inductive 
school,  and  illustrates  the  difficulty  of  drawing  any  line  between 
the  two  which  shall,  in  fact,  mark  any  distinction  except  as  to  the 
degree  in  which  one  or  another  is  disposed  to  draw  new  premises 
from   observation.^      Schmoller,    indeed,   believing   that    the   old 

^  Among  the  numerous  statements  of  the  history  and  tendencies  of  the  new  school, 
we  may  refer  to  Professor  Ingram's  remarkable  article,  "  Political  Economy,"  in  the 
ninth  edition  of  the  Encyclopaedia  Britannica,  and  to  Dr.  Ely's  study,  "  The  Past  and  the 
Present  of  Political  Economy,"  in  the  second  series  of  Johns  Hopkins  University  Studies. 

2  "The  Past  and  the  Present  of  Political  Economy,"  p.  8. 

^  A  striking  illustration  of  the  real  thinness  of  distinction  as  to  method  between 
the  two  schools  is  found  in  President  Walker's  comment  upon  Cairnes's  statement  of  the 
deductive  process,  that  "  nothing  could  be  added  to  this  admirable  statement  of  the 
logical  method  of  political  economy  according  to  the  so-called  German  school."  "  Politi- 
cal Economy,"  p.  15. 


42 


ESSAYS 


method  and  its  results  are  alike  obsolete,  would  postpone  for 
twenty  years  the  attempt  to  construct  a  system  of  principles ;  and 
this  would  unquestionably  be  a  logical  course  to  pursue,  if  the 
deductive  method  is  rejected  for  inherent  unsoundness,  as  often 
seems  to  be  supposed.  But  leaders  like  Roscher,  Wagner,  Cohn, 
and  writers  in  Schonberg's  "Handbuch,"  who  are  recognized  as 
representing  the  historical  movement,  accept  and  use  conclusions 
which  there  is  no  pretence  of  having  reached  save  by  the  old 
process  of  verified  deduction.  And  Wagner's  reply  to  Schmoller's 
contention  that  the  old  systematic  dogma  has  been  outlived  is 
most  emphatic.^     He  thinks  it  proper  to  object,  he  tells  us,  — 

that  this  rejection  in  the  lump  goes  too  far.  The  old  master  of  historical 
national  economy  in  Germany,  W.  Roscher,  with  good  reason,  has  not  thus 
thrown  the  "old  dogma"  overboard.  And  such  a  step  would  be  all  the  more 
questionable  from  the  difficulty  of  knowing  how  to  fill  up  the  deficiencies  ;  for, 
except  some  dry  critical  observations,  there  is  nothing  at  hand  which  can  take 
the  place  of  the  "  old  dogma."  On  the  contrary,  even  the  "  historical  national 
economists  "  make  use,  step  by  step,  of  propositions,  e.g.  in  the  theory  of  price 
and  cost,  which  are  either  a  part  of  the  "  old  dogma,"  or  follow  as  consequences 
from  it. 

It  must  be  added  that  it  is  also  quite  clear  that  this  acceptance 
of  the  old  results  is  not  a  mere  provisional  arrangement,  —  a  con- 
cession made/rt?  tempore,  as  it  were,  while  some  new  method  is 
getting  into  working  order.  To  take  as  an  example  the  case  of 
Wagner,  such  a  supposition  would  be  inconsistent  with  the  terms 
in  which  he  has  laid  down  some  of  the  leading  doctrines  of  the 
English  school,^  and,  which  is  more  important,  is  also  excluded  by 

1  See  the  article,  "  Systeniatische  Nationalokonomie,"  by  Adolph  Wagner,  in  Jahr- 
biicher  fiir  Nationalokonomie,  1 886,  p.  245.  A  large  part  of  this  article  will  be  found, 
translated,  in  the  Quarterly  Journal  of  Economics  for  October,  1886. 

2  In  the  article  just  cited,  p.  246,  Wagner  enumerates,  as  the  weightiest  points  of 
the  old  "  Dogmatik,"  the  doctrine  of  the  limitation  of  production  from  land  and  the 
theory  of  rent,  the  doctrine  of  population,  the  doctrine  of  the  limitation  of  production 
by  capital,  and  with  it  the  wages-fund  theory,  with  a  few  modifications.  All  these,  he 
says,  are  held  in  substance  by  Cohn,  Roscher,  Schaffle,  and  himself.  On  the  Malthusian 
doctrine,  see  an  important  note  in  Wagner's  "  Volkswirthschaftslehre,"  i.,  145.  It  is 
interesting  to  observe  that,  with  respect  to  the  wages-fund,  Wagner's  approval  is  given 
to  "  Mill's  older  doctrine,"  and  not  to  the  restatement  made  and  confuted  by  Mill  him- 
self in  1869.  For  Roscher's  position,  see,  inter  alia,  his  "Grundlagen  der  National- 
okonomie," §§  149-156,  242,  243.  Compare  also  "  Geschichte  der  Nationalokonomik  in 
Deutschland,"  pp.  652,  909.  In  Schonberg's  "  Handbuch,"  it  is  noticeable  that  the 
article  on  the  theoretically  crucial  subject  of  distribution  (by  Ur.  Mithoff,  of  Dorpat)  gives 


THE   REACTION    IN    POLITICAL   ECONOMY  43 

his  views  as  to  the  permanent  function  of  the  deductive  method  in 
economic  investigation.  Economic  phenomena,  in  his  opinion,  are 
properly  to  be  isolated  by  a  hypothetical  process,  in  order  to  de- 
termine their  causal  relations.  "  Only  thus  can  they  be  rightly 
grasped  and  understood,  and  their  connections  and  operative  influ- 
ences investigated."  ^  Without  examining  more  closely  into  the 
contrast  which  Wagner,  as  well  as  others,  draws  between  the 
deductive  and  inductive  methods,  it  is  enough  to  note  the  fact 
that,  in  his  judgment,  both  must  be  used,  but  in  varying  propor- 
tions. "  The  individuality  of  the  particular  investigator  must 
determine  that  now  one  and  now  the  other  method  shall  be  applied 
more  or  less  than  it  is  by  other  investigators.  This  does  not  in 
itself  present  any  occasion  for  praise  or  blame,  but  only  the 
proper  or  improper  application  of  each  method  in  the  concrete  case, 
and  the  worth  or  worthlessness  of  the  results  secured  by  each 
investigator  by  the  method  which  he  uses."  ^  Holding  this  broad 
ground  as  to  the  legitimate  application  of  both  methods,  Wagner 
appears  to  view  with  equal  distrust,  not  to  say  contempt,  the  ex- 
treme Historisimts  of  some  who  are  commonly  reckoned  as  of  the 
same  school  with  himself,  and  the  mere  abstract  dogmatism  of 
some  representatives  of  the  old  economics.  Not  by  him,  therefore, 
nor  by  the  great  writers  of  whom  he  may  properly  be  taken  as  a 
leader  and  type,  is  countenance  given  to  the  pretension  that  a 
particular  method  in  political  economy  is  the  scientific  method, 
that  its  work  alone  is  true  investigation,  or  that  upon  its  followers 
alone  must  rest  the  hope  of  the  future.  Some  of  Wagner's  warn- 
ings, indeed,  as  to  the  mischief  threatened  by  a  spirit  of  exclu- 
siveness  and  by  "  Verschnlung''  among  scholars,  seem  to  have  been 

what  would  be  called  an  orthodox  discussion  of  the  subject,  for  which  Ricardo  supplies  a 
great  part  of  the  material.  The  wild  talk,  so  often  indulged  in,  about  the  "  iron  law  of 
wages,"  finds  little  support  from  this  writer,  and  as  little  from  Roscher,  Wagner,  and 
Cohn. 

1  "  Die  okonomischen  Erscheinungen  gehoren  doch  nur  zu  den  socialen,  sind  aber 
nicht  kurzweg  die  socialen.  Sie  miissen  als  etwas  besonderes,  wenn  auch  eng  mit 
anderen  zusammenhangendes  erkannt,  daher  eben  doch,  methodologisch  richtig,  zunachst 
moglichst  isoliert  werden,  wenn  auch  auf  Grund  eines  hypothetischen  Verfahrens  in 
Bezug  auf  die  kausalen  und  konditionellen  Momente,  unter  denen  sie  zu  Stande  kommen. 
Nur  so  konnen  sie  richtig  erfasst  und  verstanden  werden.  Als  dann  erst  ist  ihre  Ver- 
bindung  mit  und  ihre  Beeinflussung  durch  andere  soziale  Momente  zu  erforschen." 
Jakrbilfher,  1886,  p.  200.     And  see  also  p.  226. 

^  /ahrbiicher,  1886,  p.  241. 


44 


ESSAYS 


written  with  a  side  glance  at  tendencies  visible  in  his  own  school 
in  Germany  and  elsewhere. 

The  "new  departure  "  in  political  economy  then,  as  illustrated 
by  this  tv^pical  case,  consists  at  most  in  the  addition  of  historical 
inquiry  to  methods  of  investigation  already  in  use.  The  extent  of 
this  addition,  and  its  relation  to  economic  theory,  ranges  all  the 
way  from  the  copious  use  of  history  to  illustrate  theory  —  as  in 
Roscher's  principal  treatise  —  to  the  specific  investigation  of  eco- 
nomic history,  with  the  light  afforded  by  long  familiarity  with 
economic  reasoning,  of  which  in  English  a  brilliant  example  is 
given  us  by  Thorold  Rogers.  But,  after  all,  the  difference  between 
the  old  school  and  the  new  is  essentially  a  difference  of  emphasis 
or  of  relative  weight  given  to  the  historical  side  of  the  subject,  and 
not  a  radical  change  of  method  in  arriving  at  economic  truths. 
The  movement  by  which  historical  inquiry  is  thus  brought  more 
or  less  into  the  foreground,  according  to  the  intellectual  tendencies 
or  the  opportunities  of  the  individual,  is,  no  doubt,  an  important 
reaction  against  the  opposite  tendency,  which  had  stopped  the 
progress  of  political  economy.  But  such  a  movement  can  become 
a  revolution  only  when  the  old  method  and  its  results  are  frankly 
abandoned,  as  is  demanded  by  Schmoller  and  the  most  advanced 
section,  in  the  expectation  of  reconstructing  the  whole  fabric  of 
the  science  by  a  new  process.  That  this  reaction  has  a  close 
affinity  with  the  intellectual  movement  which  has  given  new  life 
and  meaning  to  the  study  of  history  and  jurisprudence  is  undeni- 
able. No  doubt,  the  development  of  the  industrial  life  of  nations 
and  of  their  economic  institutions,  and  the  causes  which,  in  all 
that  relates  to  material  life,  make  one  nation  a  different  historical 
product  from  another,  could  have  no  complete  exposition  without 
the  application  of  modern  methods  of  research  and  comparative 
study.  No  doubt,  too,  the  exposition  of  these  subjects  in  the  light 
of  ascertained  economic  laws  must  be  one  of  the  conditions  of 
the  advance  of  social  science  and  of  wise  legislation.  All  this, 
however,  is  far  from  carrying  with  it  either  the  necessary  unsettling 
of  established  doctrines,  or  the  abandonment  of  the  processes  by 
which  they  have  been  established. 

There  is  another  important  subject,  however,  on  which  the  new 
school  of  political  economy  is  better  agreed,  and  as  to  which  it  is 
understood  to  be  in  strong  opposition  to  the  old  economists.     This 


THE    REACTION   IN    POLITICAL   ECONOMY  45 

is  the  vast  increase  of  the  functions  and  activity  of  the  state,  now 
called  for  in  so  many  quarters.  The  old  political  economy,  it  is 
declared,  was  "atomistic,"  and  dealt  only  with  individuals:  that  of 
the  future  must  be  social,  and  must  take  the  given  society,  not  the 
individuals  composing  that  society,  as  its  unit ;  society,  as  a  con- 
scious whole,  has  duties  limited  only  by  the  possibility  of  actively 
advancing  the  general  well-being  of  its  members ;  its  powers  are 
to  be  adapted  to  this  end,  and,  if  adapted,  are  the  justifiable,  the 
most  effective,  and  the  necessary  means  of  social  advancement.^ 
A  great  and  not  easily  definable  extension  of  the  activity  of  govern- 
ment is  thus  contemplated.  That  there  is  a  "  law  of  increasing 
functions  of  government"  may  be  an  extreme  opinion  ;2  but,  at 
any  rate,  the  old  presumption  in  favor  of  individual  freedom  is  at 
least  obscured,^  and  for  laissez  faire  is  to  be  substituted  a  system 
of  direct  and  pervasive,  although  carefully  studied,  interference. 
There  is  no  doubt  as  to  the  loftiness  of  the  ideal  which  such  a 
system  sets  before  the  government  of  any  modern  state,  or  as  to 
the  qualities  with  which  such  a  government  must  by  some  means 
be  endowed,  in  order  to  approach  this  ideal.  Such  conceptions  of 
centralized  and  all-sufficient  power,  we  may  add,  are  a  natural 
effect  both  of  imperialism  and  of  democracy ;  and,  hence,  at  this 
juncture  in  the  world's  history,  we  have  a  set  of  the  tide  from 
opposite  quarters,  in  favor  of  extending  the  functions  of  govern- 
ment, quite  as  marked  as  the  doctrinaire  tendency  of  the  last 
generation  toward  non-interference.  Whether  the  present  flow 
is  permanent,  or  is  destined  to  be  followed  by  an  ebb,  it  is  at 
present  an  active  influence  in  large  sections  of  existing  society, 
and  gives  a  marked  character  to  the  political  economy  of  the  new 
school. 

But  to  determine  the  relation  of  the  new  movement  to  the  old 
political  economy  in  this  respect,  requires  some  consideration  of 
the  place  hitherto  held  by  what  is  called  the  doctrine  of  laissez 

^  This  demand  appears  in  most  urgent  and,  as  it  seems  to  the  writer,  questionable 
terms  in  Professor  James's  declaration  that  the  State  "  must  be  continually  interfering 
[to  promote  and  create  industry] ;  otherwise,  progress  would  stop,  and  retrogression  set 
in."     "  Science  Economic  Discussion,"  p.  43. 

2  See  Ely,  "The  Past  and  the  Present  of  Political  Economy,"  p.  52  ;  and  Wagner, 
"  Volkswirthschaftslehre,"  i.,  308. 

'  See  Dr.  Schonberg's  language  as  to  the  decision  between  "  freedom  and  unfree- 
-dom."     "  Handbuch,"  i.,  48. 


46 


ESSAYS 


faire.  There  is  plainly  a  broad  distinction  between  the  assump- 
tion of  non-interference  as  one  of  the  conditions  of  a  problem  on 
which  we  are  reasoning,  and  a  recognized  principle  or  maxim  that 
no  interference  with  individual  choice,  under  such  circumstances, 
is  justifiable  or  expedient.  To  take  the  case  in  which  interference 
is  most  familiar,  —  in  the  reasoning  upon  international  trade  and 
international  values,  —  the  problem  is  to  determine  the  mode  of 
action  of  the  reciprocal  demands  made  by  two  trading  countries. 
The  reasoning  must  of  necessity  —  in  the  first  instance,  at  any  rate 
—  suppose  the  exchange  to  be  free  from  any  influences  except 
those  whose  effect  is  under  investigation ;  namely,  the  desires  of 
the  countries  respectively  to  satisfy  certain  wants  with  the  least 
effort,  and  the  means  of  satisfaction  offered  by  their  respective 
industrial  conditions  and  resources.  To  introduce  the  supposition 
of  governmental  interference  by  the  levying  of  duties  on  the  one 
side  or  the  other,  would  obviously  bring  in  a  new  element,  not 
necessary  to  the  essentials  of  the  problem,  and  of  infinitely  vari- 
able action  and  intensity.  The  exclusion  of  such  a  supposition, 
however,  carries  no  implication  whatever  as  to  the  right  or  expedi- 
ency of  interfering ;  nor  can  the  conclusions  reached,  after  such 
exclusion,  afford  more  than  a  part  of  the  grounds  on  which  to  rest 
a  judgment  as  to  such  right  or  expediency.  And  the  distinction 
thus  to  be  made  in  the  reasoning  as  to  international  dealings  holds 
good  in  the  discussion  of  other  leading  topics.  For  example,  in 
the  discussion  of  domestic  supply  and  demand  and  of  price,  it  is 
assumed  that  the  dealings  are  free  from  control  or  influence  by 
any  superior  power ;  and,  in  discussing  wages  and  profits,  it  is 
assumed  that  the  competition  of  individual  interests  acts  by  itself. 
But,  plainly,  the  question  whether  competition  may  be  restricted 
by  law  or  by  combination,  or  should  be  free,  must  be  answered 
by  entirely  independent  reasoning.  No  answer  is  implied,  or  is 
approached,  by  that  reasoning  which  merely  seeks  to  ascertain 
the  normal  effects  of  the  primary  forces  with  which  political  econ- 
omy has  mainly  occupied  itself. 

It  seems,  then,  that  laissez  faire  is  no  part  of  the  logical 
structure  of  the  old  economic  doctrine.  The  most  rigid  Ricardian 
may  accept  it  or  reject  it,  and  equally  without  derogation  from  his 
purity  of  doctrine.  And,  if  we  inquire  into  the  opinions  as  to  par- 
ticular cases  of  governmental  action  held  by  some  leading  econo- 


THE   REACTION    IN    POLITICAL   ECONOMY  47 

mists  of  the  old  school,  we  shall  find  among  them  a  singular  and 
often  forgotten  indifference  to  the  doctrine  so  commonly  associated 
with  the  system  which  they  built  up.  Adam  Smith,  as  is  often 
recalled  in  a  different  connection,  gave  his  sanction  to  interference 
in  the  two  test  cases  of  the  navigation  acts  and  of  protective  duties 
in  certain  cases.  Malthus  supported  the  protective  duties  on  Brit- 
ish corn.  Senior,  dealing  with  such  practical  subjects  as  distress 
among  the  hand-loom  weavers  and  the  reform  of  the  poor  laws, 
reached  conclusions  and  made  recommendations  often  entirely 
inconsistent  with  any  idea  of  laisses  faire.  Even  McCulloch, 
anxious  to  uphold  the  maxim  pas  trop  goiivcrncr,  still  commended 
some  legislation  on  factory  labor,  on  the  dwellings  of  the  poor, 
and  on  employer's  liability.  Mill,  first  or  last,  suggested  legisla- 
tion as  the  cure  for  pretty  nearly  every  evil  not  deemed  positively 
incurable.  In  every  one  of  these  cases,  —  and  the  list  might  be 
extended  easily,  —  it  is  clear  that  the  writer  had  no  principle,  as 
regards  governmental  interference,  which  could  prevent  his  recom- 
mending it,  if  he  thought  the  object  aimed  at  important  enough, 
and  the  prospect  of  success  good.  And  Cairnes  finally  went  so 
far  as  to  declare  expressly  that  "  the  maxim  of  laissez  faire  has  no 
scientific  basis  whatever,  but  is  at  best  a  mere  handy  rule  of  prac- 
tice, useful,  perhaps,  as  a  reminder  to  statesmen  on  which  side  the 
presumption  lies  in  questions  of  industrial  legislation,  but  totally 
destitute  of  all  scientific  authority,"  or,  as  he  said  in  another  place, 
"  a  rule  which  must  never  for  a  moment  be  allowed  to  stand  in  the 
way  of  the  candid  consideration  of  any  promising  proposal  of  social 
or  industrial  reform."  ^ 

It  is  plain,  in  short,  that,  not  only  logically,  but  according  to 
the  practice  of  leading  economists,^  the  maxim  of  laissez  faire, 
whatever  validity  we  assign  to  it,  has  to  do  only  with  the  practical 
applications  of  economic  reasoning,  and  has  no  place  as  a  part  of 
the  reasoning  itself.  It  belongs  in  the  same  sphere  with  a  great 
variety  of  other  considerations,  which  must  be  weighed  by  the  legis- 
lator and  by  the  economist  when  he  considers  legislative  proposi- 

1  See  his  essay  on  "Political  Economy  and  Laissez  Faire,''''  "Essays  in  Political 
Economy,"  p.  244. 

2  But  for  a  highly  fanciful  statement  of  laissez  faire  as  an  integral  part  of  the  deduc- 
tive political  economy,  see  M.  Laveleye's  article,  Revue  des  Deux  Mondes,  July,  1875, 
P-  447- 


48  ESSAYS 

tions,  but  which  do  not  affect  those  relations  of  cause  and  effect 
known  as  economic  laws.  It  is  no  doubt  true  that,  for  various 
reasons,  the  great  majority  of  economists  of  the  deductive  school 
have  in  fact  given  so  much  effect  to  the  maxim  as  to  recognize 
a  presumption  in  favor  of  non-interference,  to  be  set  aside  only  for 
strong  reasons.  In  the  familiar  case  of  protective  customs  duties, 
it  is  no  doubt  true  that  their  conclusions  in  favor  of  freedom  have 
often  rested  upon  such  broad  ground  as  to  account  for,  if  not  jus- 
tify, the  common  belief  that  a  general  doctrine  of  laissez  faire  lies 
at  the  foundation  of  the  deductive  political  economy.  Still,  it  is 
with  perfect  ease,  and  with  no  sense  of  logical  inconsistency,  that 
the  German  writers  already  noticed  can  adopt  the  most  critical 
points  of  doctrine  from  the  English  school,  and  yet  demand  an 
increase  of  the  state's  activity,  without  apparent  limit. 

But  behind  this  practical  tendency  in  favor  of  a  more  effective 
use  of  the  authority  of  the  state,  lies  what  seems  to  be  regarded 
as  the  chief  theoretical  characteristic  of  the  new  movement,  "the 
reunion  of  ethics  with  political  economy."  The  power  of  society 
is  to  be  directed  by  a  keen  sense  of  duties,  scientifically  defined 
and  recognized.  The  obligation  to  consider  other  and  higher  aims 
than  the  mere  enriching  of  the  community,  the  duty  of  treating 
the  laborer  as  something  more  than  a  certain  amount  of  energy  to 
be  made  effective  by  the  administration  of  certain  doses  of  capital, 
the  constraint  of  Christian  brotherhood,  are  to  be  enforced  as  a 
part  of  the  teachings  of  political  economy.  And  thus,  it  is 
declared,  a  new  life  is  to  be  given  to  a  science  which  has  hitherto 
regarded  man  as  living  by  bread  alone.  Without  wasting  time 
upon  a  needless  defence  of  the  older  political  economy,  against 
charges  certainly  not  based  upon  any  real  examination  of  the  uses 
to  which  economic  truth  has  been  held  to  be  applicable,  it  must  be 
remarked  that  a  good  deal  of  the  current  talk  of  an  ethical  politi- 
cal economy  appears  to  contemplate  merely  the  infusion  of  emotion 
into  economics.  But,  after  all,  can  there  be  any  doubt  that  even 
the  most  generous  emotions  must  find  their  place,  not  in  reasoning, 
but  in  the  use  of  the  results  of  reasoning .''  Is  there  any  doubt 
that  our  sympathy  with  the  aspirations  of  the  working  classes  in 
their  centuries  of  effort,  or  our  zeal  for  whatever  shall  bring  the 
masses  of  society  into  the  full  light  and  warmth  of  modern  civiliza- 
tion, is  and  must  always  be  altogether  foreign  to  the  question  as  to 


THE   REACTION    IN    POLITICAL   ECONOMY  49 

the  causes  which  determine  wages  ?  Both  in  the  pulpit  and  in  the 
press,  it  sometimes  seems  to  be  assumed  that  really  humane  econo- 
mists may  be  expected  to  avoid  any  conclusions  which  unpleasantly 
recognize  the  persistence  of  moral  as  well  as  physical  evil.  But, 
surely,  there  is  no  need  of  arguing  that  humanity  and  generosity, 
or  their  opposites,  are  not  to  be  predicated  of  a  string  of  syllogisms. 
And  it  is  hardly  more  necessary  to  point  out  that  even  the  enlight- 
ened conscience  must  find  its  place  for  action  after  reason  has 
determined  the  conditions  under  which  it  is  obliged  to  act.  Li 
short,  the  question  what  ought  to  be,  or  what  we  wish,  must  be 
kept  clear  from  the  question  what  is,  if  we  wish  for  any  trust- 
worthy answer  to  either.  Bastiat  is  a  good  example  of  what  befalls 
an  economist  who  permits  his  aspirations  for  great  ethical  and 
social  aims  to  mix  with  his  reasoning ;  and,  in  his  case,  we  have, 
as  the  result,  a  set  of  harmonies  which,  it  seems  to  be  agreed  on 
all  sides,  are  admirable  in  every  respect  except  consonance  with 
fact. 

So  far,  then,  as  relates  to  the  determination  of  economic  truth, 
we  may  be  certain  that  the  greater  weight  promised  to  ethical  con- 
siderations by  the  new  school  will  have  no  effect.  It  will  continue 
to  be  necessary  in  this  as  in  every  other  department  of  investiga- 
tion, that  the  investigator  should  proceed  with  a  single  eye  to  the 
truth,  and  that  reason  alone  should  guide  his  inquiry  as  to  scientific 
law,  —  in  short,  that  the  logical  process  should  be  logical,  leaving 
to  the  emotions,  conscience,  and  the  higher  law  their  own  field  of 
activity  at  another  stage.  It  was  a  shock  to  Mr.  Carey's  sensi- 
biUties  to  find  Senior  declaring  it  the  economist's  duty  to  allow 
"  neither  sympathy  with  indigence  nor  disgust  at  profusion  and 
avarice,  neither  reverence  for  existing  institutions  nor  detestation 
of  existing  abuses,  neither  love  of  popularity  nor  of  paradox  nor  of 
system,  to  deter  him  from  stating  what  he  believes  to  be  the  facts, 
nor  from  drawing  from  those  facts  what  he  believes  to  be  the 
legitimate  conclusion."  ^  But,  doubtless,  even  Mr.  Carey  would 
have  found  it  difficult  to  present  any  other  hopeful  or  even  possi- 
ble basis  for  scientific  discussion.  As  Httle  can  the  historical 
school,  if  it  is  to  do  any  permanent  work,  allow  either  generous 
aspirations  or  social  duties  to  interpose  their  influences,  except  in 
their  due  place. 

1  Carey's  "Social  Science,"  i.,  196. 
E 


50  ESSAYS 

That  such  an  influence  has  its  due  place  before  economic  results 
are  applied  in  practice,  is  not  a  matter  of  serious  dispute ;  ^  and  the 
whole  question  of  the  relation  of  ethics  to  political  economy 
resolves  itself,  therefore,  as  was  pointed  out  in  the  earlier  part  of 
this  article,  into  a  bare  question  of  classification.  Shall  our  nomen- 
clature be  such  as  to  make  the  term  "  poHtical  economy  "  include 
the  ethical  sphere  or  not  ?  To  the  present  writer,  the  strict  limi- 
tation of  the  term  appears  to  be  the  preferable,  as  it  has  been  the 
common,  usage.  But  whether  this  usage  is  retained  or  not  can 
make  no  difference  as  to  the  course  really  to  be  followed.  How- 
ever our  classification  may  divide  or  group  the  topics  relating  to 
this  order  of  thought,  the  process  adopted  for  the  elucidation  of 
scientific  law  must  of  logical  necessity  be  kept  free  from  ethical 
considerations;  and  these  considerations  must,  by  equally  strin- 
gent necessity,  be  taken  into  account  finally  among  the  grounds  of 
action.  "  But,  if  the  science  is  only  to  consider  what  is  and  not 
what  ought  to  be,"  complains  Laveleye,  "  it  can  neither  propose 
nor  pursue  any  ideal."  To  which  it  must  be  rejoined,  that  the 
business  of  a  science  is  not  to  propose  or  pursue  ideals,  but  to 
ascertain  truths,  —  a  work  which  ought  not  to  be  perturbed  by 
aspirations  any  more  than  by  any  other  form  of  prepossession. 
And,  as  truths  once  ascertained  are  to  be  used  in  due  place  and 
season,  it  is  easy  to  see  that  the  great  aim,  the  advancement  of 
society,  is  not  set  at  risk  by  the  strict  regard  paid  to  the  definition 
of  a  science,  as  M.  Laveleye  seems  to  apprehend. 

The  new  movement,  then,  on  the  whole,  although  represented 
by  impassioned  advocates  as  a  revolution  which  is  to  sweep  the 
ground  clear  and  give  the  world  a  new  political  economy,  is,  in  fact, 
a  development  of  the  existing  science,  under  the  influence  of  a 
strong  reaction  against  tendencies  which  had  prematurely  checked 
its  advance.  So  far  as  this  development  is  historical  in  character,  it 
means  a  fresh  impulse  given  to  the  study  of  the  social  fabric,  past 
and  present,  in  its  origin  and  its  results,  but  not  at  present  the 
adoption  of  any  new  method  of  investigation,  even  if,  in  dealing 

^  The  extreme  advocates  of  laissez  /aire  are  sometimes  spoken  of  with  a  misplaced 
note  of  reprobation,  as  if  they  denied  the  existence  of  all  moral  considerations  in  con- 
nection with  any  question  touching  wealth  ;  but  clearly  there  is  no  necessary  inconsist- 
ency between  a  full  recognition  of  the  moral  aspect  of  a  subject  and  disbelief  in  the 
right  or  power  of  government  to  act  upon  it. 


THE   REACTION    IN    POLITICAL   ECONOMY  51 

with  this  subject-matter,  any  real  change  of  method  is  practicable, 
—  a  point  which  may  at  least  be  held  in  reserve  until  further 
proof.  And,  so  far  as  the  new  development  is  social  or  ethical,  it 
means  an  increase  of  weight  given  to  obligations  which  have  been 
ignored  oftener  than  denied,  and  the  consideration  of  which  can 
neither  supersede  nor  control  any  reasoning,  deserving  the  name 
of  scientific,  upon  economic  questions.  The  importance  of  the 
movement,  even  in  this  view  of  its  scope,  as  tending  to  direct  the 
attention  of  the  economic  world,  for  the  present  generation  at  least, 
to  new  problems,  and  perhaps  to  revive  its  interest  in  topics  too 
easily  neglected,  can  hardly  be  overrated.  But  this  new  direction 
of  thought  is,  after  all,  not  the  absolute  break  of  continuity  so 
often  proclaimed. 

It  is  to  be  said,  too,  that  such  a  movement  as  the  present  need 
not  be  regarded  with  a  jealous  eye,  by  those  of  us  who  still  believe 
that  the  method  of  Ricardo  and  Mill  and  Cairnes  is  the  best  and 
even  the  only  sure  method,  for  threading  the  way  through  the 
mazes  of  conflicting  motives  which  underlie  economic  phenomena. 
Even  the  excessive  cultivation  of  fields  heretofore  neglected  must 
be  viewed  by  the  adherents  of  the  deductive  school  as  not  only 
natural,  but  hopeful.  They  will  not  deny  that  the  current  political 
economy  needs  to  be  brought  into  closer  relation  to  the  life  of  to- 
day ;  and,  whatever  else  the  reaction  may  succeed  or  fail  in  doing, 
it  will  certainly  compel  all  economists  to  carry  their  researches 
deeper  into  actual  phenomena.  Moreover,  so  long  as  the  investiga- 
tion of  truth,  by  whatever  means,  is  the  guiding  purpose  of  the 
movement,  its  result  must  be  the  accumulation  of  material,  rich  and 
varied,  to  be  brought  ultimately  into  the  service  of  science.  And, 
even  if  dogmatism  and  the  growing  arrogance  of  a  school  secure 
the  sway  and  wreck  the  possible  career  of  the  new  economics,  the 
old  will  at  least  have  undergone  a  salutary  discipline  and  received 
a  new  impulse. 


THE   ACADEMIC   STUDY  OF  POLITICAL  ECONOMYi 

The  last  quarter  of  a  century  has  seen  a  remarkable  aevelop- 
ment  of  political  economy  as  an  academic  study.  For  special 
reasons  connected  with  the  organization  of  the  universities  and  of 
institutions  for  liberal  education  generally,  this  development  is  not 
so  marked  in  France  or  England  as  it  is  in  Germany,  in  the  United 
States,  or,  perhaps,  in  Italy;  but  it  has  everywhere  been  sufficient 
to  bring  forward  economic  science,  from  its  old  position  as  the 
curious  pursuit  of  a  limited  class  of  specialists,  to  a  recognized 
place  as  a  department  of  thought,  the  further  exploration  of  which 
must  be  carefully  provided  for  by  any  well-equipped  academic 
body.  In  our  own  country  in  particular,  no  one  of  the  moral 
sciences  has  made  a  more  rapid  or  solid  gain  than  political 
economy,  either  in  the  extent  and  importance  of  its  scientific  inves- 
tigations, or  in  the  dignity  of  method  and  spirit  which  characterizes 
its  work,  or  in  its  educational  value. 

The  reasons  for  this  important  advance,  it  is  to  be  noted,  are  in 
some  degree  independent  of  those  which  determine  the  value  of 
economic  science  for  the  professional  educator  and  make  it  for  him 
an  important  branch  of  liberal  training.  For  him  it  is  a  study 
which  is  to  discipline  and  open  the  mind,  and  prepare  it  to  meet 
the  problems  offered  by  professional  work  or  by  active  business. 
The  educational  value  of  economic  study  has,  in  fact,  but  little  to 
do  with  the  actual  content  of  the  science.  Even  if  it  were,  as  has 
been  said,  a  mere  discussion  of  "  lunar  politics  "  or  of  social  rela- 
tions under  the  rings  of  Saturn,  although  it  would  lose  in  interest, 
it  would  still  afford  one  of  the  best  means  of  training  ♦•he.  reason- 
ing powers  to  deal  with  the  questions  of  complex  causes  presented 
to  us  in  such  infinite  variety  by  human  life.^     In  short,  the  value 

1  Qiiarttrly  Journal  of  Economics,  ]\yS.\,  1 89 1. 

*  See  some  excellent  remarks  on  this  subject  by  Professor  Patten,  of  the  University 
of  Pennsylvania,  in  his  paper  on  "The  Educational  Value  of  Political  Economy,"  in  the 
publications  of  the  American  Economic  Association,  vol.  v.,  No.  6,  p.  ii. 

e2 


THE   ACADEMIC   STUDY   OF   POLITICAL   ECONOMY  53 

of  political  economy  as  a  dialectic  would  remain,  although  it  found 
no  immediate  application  in  the  society  around  us.  Probably  every 
earnest  teacher  of  the  subject  feels  an  interest  in  his  work,  then, 
and  has  in  view  the  attainment  of  objects,  entirely  different  in  kind 
from  the  interest  and  the  purposes  which,  to  the  non-professional 
observer,  would  seem  to  be  most  natural. 

But  the  interest  with  which  the  general  pubhc  view  the  aca- 
demic study  of  economics  and  the  widespread  demand  for  its 
extension,  as  well  as  the  pressure  of  students  for  introduction  to  its 
elements  and  its  methods,  no  doubt  spring  from  entirely  different 
considerations.  It  is  the  perception  of  the  scope  and  importance 
of  the  questions  with  which  political  economy  deals  that  turns  the 
popular  current  so  strongly  toward  it  to-day.  It  is  keenly  felt 
that  on  the  right  answer  of  these  questions  must  depend  not  only 
the  future  progress  of  society,  but  also  the  preservation  of  much 
that  has  been  gained  by  mankind  in  the  past ;  and  it  is  inevitable 
that  the  community  should  desire  to  see  such  problems  investigated 
under  the  conditions  and  by  the  methods  which  are  found  to  be 
fruitful  in  other  departments  of  study,  and  to  have  the  younger 
generation  trained  for  economic  reasoning  and  investigation  as 
thoroughly  and  assiduously  as  they  are  for  the  languages  or  phi- 
losophy or  natural  science.  We  say  advisedly  that  "  the  com- 
munity "  desire  to  see  this ;  for  nothing  is  more  striking  than  the 
interest  which  those  who  are  called  practical  men  often  show  in  the 
prosecution  and  encouragement  of  this  class  of  studies,  in  which 
nevertheless  they  take  but  little  part  directly.  That  the  scientific 
man  and  the  practical  man  are  apt  to  lack  each  other's  strongest 
qualities  —  and  so  are  complementary  to  each  other,  but  are  rarely 
complete  -  is  a  notorious  cause  of  misapprehension  and  waste  of 
energy ;  ^  but  in  this  case  we  have  both  working  together,  in  their 
common  eagerness  to  promote  the  investigation  of  economic  ques- 
tions, as  they  might  for  the  promotion  of  the  natural  and  physical 
sciences,  which  so  readily  fix  the  attention  of  the  non-professional 

1  The  remark  of  Mill  may  be  recalled,  that,  "  while  the  philosopher  and  the  prac- 
tical man  bandy  half-truths  with  one  another,  we  may  seek  far  without  finding  one  who, 
placed  on  a  higher  eminence  of  thought,  comprehends  as  a  whole  what  they  see  only  in 
separate  parts,  —  who  can  make  the  anticipations  of  the  philosopher  guide  the  observa- 
tion of  the  practical  man,  and  the  specific  experience  of  the  practical  man  warn  the 
philosopher  when  something  is  to  be  added  to  his  theory."  "Essays  on  Some  Unsettled 
Questions,"  p.  157. 


54 


ESSAYS 


observer.  We  can  go  farther,  and  say  that  public  opinion  in 
general,  in  the  countries  which  stand  highest  in  the  intellectual 
scale,  is  catholic  in  its  judgments  of  the  results  of  economic  inves- 
tigation, tolerant  of  differing  opinions,  and  fully  awake  to  the 
essential  importance  of  complete  freedom  of  thought  and  of  expres- 
sion. Especially  is  this  the  case  in  Germany,  which  for  some 
years  past  has  succeeded  in  maintaining  the  first  place  in  this 
branch  of  learning  as  in  so  many  others.  Complete  intellectual 
independence  has  there  been  conspicuous  among  the  favoring  con- 
ditions of  intellectual  progress. 

The  universities  have  everywhere  found  themselves  encouraged 
and  even  required,  therefore,  to  take  up  the  investigation  of 
economics  with  vigor  and  to  push  it  by  scientific  methods.  The 
leading  European  universities,  it  is  well  known,  have  long  been 
raising  the  standard  of  their  equipment  and  encouraging  research 
in  this  as  in  every  other  department  of  learning.  But,  limiting  our 
observation  now  to  American  institutions  alone,  the  last  fifteen 
years  have  witnessed  a  complete  transformation  of  their  work  in 
political  economy.  In  the  largest  and  most  thoroughly  organized 
of  them,  where  time  has  generally  been  gained  for  an  extended 
training,  the  independent  examination  of  economic  theories,  the 
comparison  and  weighing  of  writers,  the  determination  of  the 
points  at  which  important  schools  diverge,  and  the  application  in 
all  cases  of  the  logical  test,  which  leaves  no  place  for  the  mere 
authority  of  a  name,  have  been  carried  to  a  point  which  even  fifteen 
years  ago  would  have  been  thought  impossible.^  The  study  of 
economic  history  in  its  most  important  fields  has  been  prosecuted 
with  success,  contributions  of  recognized  value  have  been  made  to 
the  literature  of  economics,  and  students  everywhere  have  learned 
to  watch  with  interest  the  results  of  American  investigation  and 
scholarship.  The  work  that  has  been  done,  it  is  safe  to  say,  has 
been  done  with  increasing  thoroughness  and  fidelity.  The  tone 
of  American  economics,  often  supposed  to  echo  only  the  EngHsh 
school  to  which  the  scholars  of  every  country  are  proud  to 
acknowledge  their  indebtedness,   has  been  modified  in  a  singular 

1  Without  attemptinfT  an  exact  measurement  of  the  increase  of  work  which  has 
taken  place,  it  is  probal^ly  safe  to  say  that  in  the  six  or  eight  leading  American  institu- 
tions the  number  of  hours  of  instruction  given  per  week  to  economics  has  increased  on 
the  average  six  or  seven  fold  since  1876. 


THE   ACADEMIC   STUDY  OF   POLITICAL  ECONOMY  55 

way  in  favor  of  the  free  and  continuous  development  of  theory  ; 
and  the  study  and  interpretation  of  economic  history,  discarding 
the  Q3.sy  post  hoc  propter  hoc  of  the  partisan,  has  become  the  labo- 
rious and  impartial  search  for  the  facts  which  test  theories  and  ex- 
emplify principles.  No  "American  school"  has  been  developed 
in  this  rapid  progress ;  but  economic  study  in  the  United  States,  in 
the  institutions  of  learning  as  well  as  outside  of  them,  has  had  a 
serious  part  in  the  general  movement  of  economic  thought  in  the 
world  at  large. 

This  work  has  been  carried  on,  as  has  already  been  said,  by 
scientific  methods  and  in  accordance  with  a  public  demand  that  it 
should  be  so  carried  on.  The  question  often  raised  whether  politi- 
cal economy  is  in  fact  a  science  is  not  material  here.  Political 
economy  at  any  rate  aims  to  discover  the  forces  which  determine 
certain  phenomena  of  society,  their  direction,  strength,  and  mutual 
relations.  It  is,  then,  in  any  case  a  study  of  cause  and  effect,  and 
as  such  must  be  studied  in  the  scientific  manner,  whatever  place 
may  be  assigned  to  it  in  the  scientific  hierarchy.  The  circle  of 
emotions,  hopes,  and  moral  judgments  springing  from  any  eco- 
nomic fact  may  be  boundless ;  but  the  relation  of  that  fact  to  its 
cause  and  its  consequences  is  as  certainly  a  question  to  be  settled 
by  appropriate  scientific  methods  as  the  perturbation  of  a  satellite 
or  a  reaction  observed  by  the  chemist.  And  undoubtedly  the 
essential  of  the  scientific  manner  of  study  is,  that  truth  alone 
should  be  the  object  of  pursuit,  and  that  the  methods  of  investi- 
gation should  be  such  as  from  the  nature  of  the  subject-matter 
will  lead  to  the  truth  most  directly  and  surely.  That  the  results 
obtained  by  such  methods  should  be  agreeable  or  the  reverse, 
that  they  should  accord  with  prevailing  ideas  or  interests  or  be  in 
opposition  thereto,  is  altogether  aside  from  the  purpose  in  hand. 
Are  the  results  true  .-*  is  the  only  test  question  to  be  recognized  in 
such  an  inquiry.  That  the  process  of  investigation  or  reasoning 
is  not  to  be  warped  in  order  to  make  a  given  conclusion  attainable, 
that  any  conclusion  thus  attained  by  illegitimate  means  is  not  only 
worthless,  but  noxious,  follows  as  a  matter  of  course  when  the 
truth  for  its  own  sake  is  made  the  aim. 

The  universities,  in  general,  are  aided  in  their  efforts  to  incul- 
cate the  scientific  spirit  in  economic  students  by  a  very  important 
body  of  tradition  and  example  within  their  own  walls.     The  young 


56  ESSAYS 

student  of  political  economy,  who  is  urged  to  carry  on  his  investi- 
gation as  one  of  scientific  interest,  and  not  merely  of  transient 
political  concern,  cannot  help  feeling  the  influence  and  catching 
something  of  the  spirit  of  the  investigators  at  work  in  other  fields 
around  him.  The  patience,  thoroughness,  and  singleness  of  pur- 
pose which  mark  successful  efforts  in  the  great  body  of  scientific 
pursuits  set  the  standard  for  him.  His  own  teachers  may  fall 
short  of  their  own  ideal  of  scientific  method,  they  may  even  be  un- 
true to  it,  and  yet  the  observing  student  will  feel  the  sweep  of  the 
great  current  which  carries  all  genuine  lovers  of  science  toward 
the  same  end.  This  influence  of  the  general  intellectual  move- 
ment has,  moreover,  been  strengthened  in  no  small  degree  by  the 
change  which  has  taken  place  in  the  methods  of  study  pursued  in 
political  economy  itself.  The  cultivation  of  the  so-called  historical 
method  can  never  make  political  economy  anything  other  than  a 
deductive  science,  deriving  its  laws  by  logical  conclusion  from 
premises  which  are  freed  by  abstraction  from  all  non-essentials. 
But  it  would  be  idle  to  deny  that  the  verification  of  conclusions  by 
observation  and  the  selection  of  new  premises  for  further  reasoning 
—  in  a  word,  that  the  thoroughness  of  the  deductive  process  and 
the  general  scope  of  the  study  —  have  been  advanced  in  a  high 
degree  by  the  improved  methods  of  research  and  comparison, 
which  have  been  made  applicable  in  political  economy  as  well  as 
in  other  moral  sciences.  It  would  be  difficult  to  find  a  writer  upon 
economics,  however  severe  his  theoretical  method,  whose  mental 
attitude  does  not  show  a  remarkable  change  from  the  "stalled" 
condition  in  which  his  predecessors  of  thirty  years  ago  found 
themselves.  And  the  student  finds  in  this  extended  range  of  inter- 
est at  once  a  stimulus  to  the  acquisition  of  the  best  equipment 
and  training  for  independent  research,  and  a  safeguard  against 
the  mere  absorption  of  an  expounded  system.  So  far  as  the  true 
scientific  spirit  has  made  its  way,  the  student  in  economics,  as  else- 
where, more  and  more  follows  Bacon's  injunction,  to  "read,  not  to 
contradict  and  refute,  nor  to  believe  and  take  for  granted,  .  .  .  but 
to  weigh  and  consider." 

So  much  being  premised  as  to  the  spirit  and  method  at  present 
governing  the  academic  study  of  economics,  in  the  leading  institu- 
tions in  all  countries  having  any  important  place  in  the  intellectual 


THE    ACADEMIC    STUDY   OF    POLITICAL    ECONOMY  57 

world  to-day,  we  have  next  to  remark  upon  the  singular  derogation 
from  scientific  methods  implied  in  the  demands  frequently  made 
in  the  last  few  years  in  the  United  States  for  some  different  and 
special  treatment  of  the  burning  question  of  protection  or  free 
trade.  That  this  question  should  be  singled  out  for  such  demands 
is  no  doubt  due  to  the  fact  that,  especially  since  1880,  it  has  become 
political  to  a  greater  extent  than  for  many  years  previously.  As 
a  political  question,  it  is  often  treated  by  partisans  in  the  heat  of 
discussion  as  if  its  solution  were  the  chief,  and  sometimes  as  if  it 
were  the  only,  aim  of  political  economy.  It  would  not  be  difficult 
to  cite  public  speakers,  very  high  in  station,  who  have  been  alto- 
gether unable  to  recognize  any  other  subject  of  interest  in  the 
economic  field  :  whereas,  it  must  be  remarked  for  completeness  of 
statement,  international  trade  has  to  compete  for  attention,  in  any 
general  survey  of  that  field,  with  such  broad  and  absorbing  ques- 
tions as  those  relating  to  money,  land,  labor,  and  socialistic  reform, 
all  of  which  antedate  the  free-trade  controversy  and  are  likely  to 
disappear  only  with  human  society  itself.  These  questions  are  all 
intrinsically  as  important  as  the  question  between  a  high  tariff  and 
a  low  one,  and  every  one  of  them  probably  concerns  our  material 
interests  in  even  greater  degree,  and  with  our  material  interests 
others  still  more  vital.  But  on  no  one  of  these  subjects  has  dogma 
yet  fairly  crystallized  into  political  platforms,  and  they  are,  there- 
fore, still  recognized,  by  most  of  the  world,  as  the  proper  subject- 
matter  for  unbiassed  scientific  inquiry  ;  and  the  answer  to  be  given 
by  science  is  still  looked  for  with  interest,  if  not  with  hope. 

The  call  for  exceptional  treatment  of  the  question  between  pro- 
tection and  free  trade  is,  in  effect,  a  demand  that  upon  a  contro- 
verted point,  as  to  which  scientific  opinions  are  not  at  one,  political 
economy  shall  be  made  to  give  its  answer  in  a  particular,  predeter- 
mined sense.  This  is  the  real  purport  of  the  complaints  made  by 
scores  of  public  speakers  in  the  canvass  of  1888,  and  frequently 
repeated  by  the  press,  as  to  the  supposed  tendencies  of  the  instruc- 
tion in  political  economy  in  a  large  part  of  the  American  colleges 
and  universities.  The  complaints,  in  most  cases  at  least,  did  not 
relate  to  methods  of  training  or  investigation  ;  for  they  were  mani- 
festly made  without  knowledge  of  the  methods  pursued.  The  gist 
of  the  complaints  was  that  certain  specified  results  of  reasoning 
had  been  reached,  —  results  not  set  down  as  eccentric  and  possibly 


58  ESSAYS 

indicative  of  individual  lack  or  balance,  but  commented  on  as 
showing  necessarily  and  of  themselves  a  certain  bias  in  the  aca- 
demic mind  generally.  In  short,  the  attempt  was  made  to  judge 
of  a  body  of  scientific  inquirers  by  reference,  not  to  their  pro- 
cesses, but  to  their  opinions  upon  questions  still  sub  jiidice.  This 
was  not  far  different  from  requiring  of  them  the  profession  of  a 
creed. 

In  some  cases,  the  requirement  of  a  creed  has  gone  still  farther, 
if  very  widespread  report  may  be  trusted.  In  more  than  one  state 
university,  and  in  some  minor  institutions  within  the  last  few  years, 
it  has  been  understood  the  purpose  has  been  avowed  of  filling 
existing  vacancies  only  by  the  appointment  of  men  holding  a  par- 
ticular set  of  opinions  upon  the  vexed  question.  It  has  long  been 
an  open  secret  that,  at  an  earlier  date,  one  important  school  of 
public  economy  was  founded  with  the  express  provision  that  it 
should  avoid  the  judicial  attitude  of  a  scientific  body  and  establish 
an  active  propaganda  of  the  views  of  its  founders.^  It  would  be 
hard  to  find  a  parallel  for  such  intolerance  of  scientific  investiga- 
tion and  substantial  indifference  to  truth  as  these  cases  disclose, 
in  any  institutions  of  equal  standing,  when  dealing  with  any  other 
subject  claiming  scientific  rank.  Indeed,  the  closest  parallel  to  be 
found  is  that  presented  by  the  denominational  theological  schools, 
in  which,  a  creed  being  required  by  the  rigor  of  the  case,  any  pre- 
tensions on  the  score  of  scientific  character  naturally  take  an 
altogether  subordinate  position.  It  is,  in  fact,  difficult  to  imagine 
any  corresponding  requirement  made  of  a  professor  of  geology,  or 
chemistry,  or  mathematics,  and  nearly  as  difficult  to  imagine  it  in 
the  case  of  a  philosopher,  historian,  or  jurist.  The  case  may 
indeed  be  cited  of  a  seminary  in  South  Carolina,  the  trustees  of 
which,  a  few  years  ago,  were  so  ill-advised  as  to  displace  a  pro- 
fessor on  the  avowed  ground  that  he  was  an  evolutionist ;  ^  but 
this  transaction  was  too  much  obscured  by  the  odium  theologicum 
to  be  important  in  the  present  connection. 

'  The  secrecy  which  was  judiciously  maintained  as  to  the  text  of  the  original 
instrument  in  this  well-known  case  makes  it  impossible  to  cite  the  exact  language  here. 
It  is  understood  that  wiser  counsels  have  ultimately  prevailed,  and  that  the  impossible 
terms  of  the  original  foundation  have  been  relaxed  so  as  not  to  be  inconsistent  with  the 
dignity  of  self-respecting  scholars,  or  with  the  enjoyment  of  scientific  reputation  by  the 
school  itself. 

"^  See  the  Nation,  October  2  and  December  iS,  1884. 


THE   ACADEMIC   STUDY   OF   POLITICAL   ECONOMY  59 

More  plausible,  but  not  more  defensible  in  reason,  than  the 
requirement  of  a  creed  is  the  suggestion  not  infrequently  made, 
that  upon  a  subject  like  this  it  is  the  duty  of  a  fully  equipped  uni- 
versity to  have  instruction  given  upon  both  sides  of  the  controverted 
question,  and  by  instructors  selected  for  this  purpose,  —  not  se- 
lected, therefore,  as  being  the  best  available  persons,  irrespective 
of  their  opinions  upon  this  matter,  but  selected  because  of  those 
opinions  in  order  to  represent  opposing  theories.  Any  individual 
dealing  with  such  a  question,  it  is  maintained,  must  have  his  opin- 
ions formed.  Let  his  desire  to  preserve  a  judicial  impartiality  in 
training  and  directing  his  students  be,  then,  as  great  as  it  may,  his 
own  thought  as  to  the  conclusions  to  be  reached,  it  is  said,  must 
needs  give  a  bias  to  his  instruction,  and  in  any  case  must  be  evident 
to  his  hearers,  carrying  authority  in  their  minds  and  thus  tending 
to  educate  them  exclusively  to  his  views.  Therefore,  it  is  con- 
cluded, both  sides  should  be  presented  with  conviction  by  those  who 
are  qualified  and  anxious  to  set  their  respective  opinions  in  their 
best  light,  and  the  ingenious  student  should  be  permitted  to  make 
his  choice  of  results  freely.  There  can  be  no  doubt  that  what  is 
called  a  "joint  discussion"  thus  permanently  established  in  a  uni- 
versity would  be  a  highly  attractive  exhibition,  and  that  by  its  aid 
a  study  sometimes  found  arid  might  easily  be  made  entertaining. 
But  here,  again,  there  is  probably  no  other  subject  in  the  academic 
range  concerning  which  such  a  proposition  would  not  instantly  be 
covered  with  ridicule — no  other  subject,  with  the  possible  excep- 
tion of  theology,  in  which  the  incongruity  of  establishing  a  man  to 
preach  a  doctrine  and  caUing  this  the  promotion  of  science  would 
not  be  instantly  perceived.  There  may,  indeed,  be  the  case  in 
which  two  expositors  of  a  given  subject  by  fortunate  chance 
present  it  in  different  aspects,  and  true  investigation  may  gain 
thereby  ;  but  this  is  something  radically  different  from  the  propo- 
sition which  we  are  now  considering,  to  establish  a  permanent 
polemic  between  men  selected  as  advocates,  not  to  say  as  partisans. 

The  reason  of  this  incongruity  is  not  far  to  seek.  Let  us  sup- 
pose by  way  of  illustration  that,  by  some  change  of  public  opinion, 
the  socialistic  movement  should  reach  the  political  stage  of  devel- 
opment, and  some  proposition  involving  the  main  principle  should 
find  its  affirmative  or  negative  in  all  the  party  platforms.  Nothing 
could  be  more  natural  than  for  the  socialists  to  declare  that,  for  the 


6o  ESSAYS 

right  investigation  of  their  system,  the  presentation  of  it  by  con- 
vinced socialists  is  absolutely  necessary,  that  justice  to  their  argu- 
ments cannot  be  expected  from  those  who  still  cling  to  the  old 
order  of  things,  and  that  debate  between  advocates  will  best  eluci- 
date the  truth.  Indeed,  the  socialists  might  well  set  up  to-day  the 
demand  for  special  representation  upon  the  staff  of  any  large  uni- 
versity, if  the  importance  of  the  question  raised  by  them,  its  inevi- 
table claim  for  an  answer,  and  the  risk  of  prepossession  against 
them,  are  sufficient  grounds  for  such  representation.  But  among 
sober-minded  seekers  of  truth  —  and  we  have  no  concern  with  any- 
body else  —  there  would  be  little  doubt  that,  in  any  such  case,  the 
process  of  systematic  representation  of  adverse  views  would  be 
the  conflict  of  prejudices  rather  than  a  true  investigation,  and  that 
it  bears  no  likeness  whatever  to  the  careful  and  reasoned  methods 
by  which  any  scientific  inquiry  advances  from  step  to  step.  In 
short,  the  method  of  treatment  would  be  felt  to  be  incongruous 
with  the  subject-matter.  The  same  would  be  true  of  every  ques- 
tion of  economics,  so  far  as  it  is  a  fit  subject  for  academic  treat- 
ment. The  subject-matter  is  in  every  case  a  relation  of  cause  and 
effect,  requiring  to  be  studied  with  a  single  eye  to  truth  of  result ; 
but  the  proposed  method  effectually  excludes  the  probability  of 
such  study  on  either  side  of  the  question,  by  presupposing  advo- 
cacy, when  the  process  of  investigation  plainly  ought  to  be  kept 
as  free  as  is  humanly  possible  from  every  disturbing  influence.-^ 

After  all,  however,  the  question  must  remain.  What  is  the 
proper  treatment  of  the  disputed  topics  which  necessarily  come 
to  view  in  the  scientific  exposition  of  political  economy .-'  As  has 
been  said  above,  these  topics  are  not  few  in  number,  although  few 
of  them  have  reached  the  political  stage.  The  economic  and 
social  effects  of  private  ownership  of  land ;  the  effects  and  the 
claims  for  preference  of  different  methods  of  taxation,  direct  or 
indirect,  upon  property  real  or  personal,  and  proportional  or  pro- 
gressive ;  the  choice  between  government  currency  and  bank  paper, 
and  between  the  gold  standard  and  the  free  coinage  of  silver ;  the 

1  There  is,  of  course,  paid  representation  of  opposite  opinions,  and  perhaps  upon 
essentially  scientific  propositions,  whenever  a  court  hears  a  case  argued  by  counsel  ;  but 
this  method  of  informing  the  highly  trained  mind  of  the  court  of  all  the  considerations 
that  can  be  presented  on  either  side,  as  a  preparation  for  its  decision,  has  no  analogy  to 
the  case  of  the  university,  where  the  minds  addressed  are,  from  the  nature  of  the  case, 
not  yet  trained,  ami  the  work  in  hand  is  not  decision,  but  training. 


THE   ACADEMIC   STUDY  OF   POLITICAL   ECONOMY  6r 

choice  between  private  and  state  ownership  of  public  works ;  the 
powers  and  duty  of  the  state  with  respect  to  combinations  of  cap- 
ital on  the  one  hand  and  of  labor  on  the  other ;  the  fundamental 
question  of  all,  as  to  the  organization  of  society  upon  the  basis  of 
individual  property  rights  or  upon  that  of  communism,  qualified 
or  complete,  —  such  questions  as  these,  no  less  than  that  between 
protection  and  free  trade,  fill  the  public  mind,  frequently  divide 
enlightened  opinion,  and  call  for  investigation  by  processes,  if  they 
can  be  found,  as  scrupulously  scientific  as  those  of  mathematics. 
On  some  of  these  questions  the  judgment  of  the  best  trained  econ- 
omist may  well  be  in  suspense.  On  some  of  them,  and  perhaps 
on  most,  every  earnest  scholar  is  likely  to  have  his  opinion  formed, 
and  in  that  case,  although  his  mind  should  still  remain  open  for 
fresh  light,  is  tolerably  certain  to  feel  his  interest  strongly  engaged 
on  the  one  side  or  the  other.  Such  is  the  inherent  difificulty  of 
treating  by  scientific  methods  any  subject  which  has  a  direct  bear- 
ing upon  the  action  or  well-being  either  of  society  or  of  its  indi- 
vidual members. 

Nothing  need  be  said  here  as  to  the  necessity  of  impartiality 
of  judgment,  for  that  is  of  the  essence  of  any  scientific  method. 
As  little  need  be  said  of  the  frequently  suggested  claims  of  sym- 
pathy or  patriotism,  for  these  have  their  place  in  an  inquiry  of  an 
entirely  different  order  from  the  search  for  economic  truth.  It  is 
to  be  presumed  that  the  guide  in  such  a  search  preserves  at  any 
rate  the  consciousness  of  impartial  purpose,  and  aims  to  keep  his 
mind  free  from  all  influences  foreign  to  the  matter  actually  in 
hand.  Giving  him  the  benefit  of  this  presumption,  what  is  he  to 
do  with  the  occasions  which  lie  all  along  his  path  for  the  state- 
ment or  suggestion  of  individual  opinion  upon  questions  like  those 
referred  to  above .-' 

At  this  point  we  must  recall  the  distinction  often  insisted  upon 
by  economists,  and  as  often  forgotten  by  them  as  by  anybody  else, 
between  economic  laws  and  the  application  of  those  laws  in  practi- 
cal administration  and  legislation.  The  economic  lav/,  the  deduc- 
tion of  pure  science,  is  simply  the  statement  of  a  causal  relation, 
usually  between  a  small  number  of  forces  and  their  joint  effect, 
possibly  between  a  single  force  and  its  effect.  For  the  statement 
of  that  relation  the  case  has  been  freed  from  every  disturbing 
element,  and  with  the  result,  it  is  hardly  necessary  to  repeat,  of 


62  ESSAYS 

giving  a  proposition  which,  however  important,  is  only  condition- 
ally true.  The  laws  of  value,  in  their  simplest  generalization,  are 
true  only  under  certain  assumed  conditions  of  complete  competi- 
tion. The  law  of  rent  is  a  fine  example  of  a  law  of  never  failing 
operation,  which,  however,  is  not  usually  seen  with  its  conditions 
in  the  absolutely  simple  state  in  which  the  economist,  for  the  pur- 
poses of  reasoning,  imagines  them.  But,  when  we  come  to  the 
application  of  economics  to  legislation,  we  enter  at  once  into  a 
region  of  necessarily  confused  conditions,  and  also  become  con- 
scious of  objective  ends  often  having  little  or  no  relation  to  any 
economic  doctrine.  For  any  purpose  of  legislation,  the  social  and 
industrial  conditions  of  a  country  —  such  as  they  have  been  made 
by  long  past  history,  by  newly  kindled  enterprise,  or  by  sudden 
calamity  —  have  to  be  a  guiding  consideration.  The  present 
needs  of  a  people  have  to  be  weighed,  perhaps,  against  what  might 
seem  to  be  its  ultimate  advantage ;  and  what  is  socially  or  politi- 
cally possible  has  to  be  accepted  as  the  limit. ^  The  objects  aimed 
at  by  legislation  may  also  be  entirely  different  from  those  sug- 
gested by  simple  economic  deductions.  For  the  purposes  of  the 
legislator,  even  the  certainty  of  economic  loss  which  is  indicated 
by  some  unquestioned  principle  may  be  an  entirely  immaterial 
consideration,  to  be  set  aside  as  of  no  weight  in  comparison  with 
the  object  in  view,  or  as  merely  the  cost  which  he  can  afford  to 
pay  for  some  great  uneconomic  gain.^  We  can  even  conceive  the 
economist  as  deliberately  contravening,  in  view  of  the  general  con- 
ditions of  the  case,  what  would  seem  to  be  the  natural  conclusion 
from  his  own  doctrine,  —  as,  for  example,  we  may  conceive  a  be- 

^  Mr.  Keynes  observes  that  "in  a  few  departments,  such  as  those  of  currency  and 
banking,  we  meet  with  cases  where,  having  determined  the  economic  consequences  of  a 
given  proposal,  we  practically  have  before  us  all  the  data  requisite  for  a  wise  decision  in 
regard  to  its  adoption  or  rejection.  But  more  usually  —  where  we  pass,  for  instance,  to 
problems  of  taxation,  or  to  problems  that  concern  the  relations  of  the  state  with  trade 
and  industry,  or  to  the  general  discussion  of  communistic  and  socialistic  schemes  —  it  is 
far  from  being  the  case  that  economic  considerations  hold  the  field  exclusively.  Account 
must  also  be  taken  of  ethical,  social,  and  political  considerations  that  lie  outside  the 
sphere  of  political  economy  regarded  as  a  science."  "The  Scope  and  Method  of  Politi- 
cal Economy,"  p.  55.  It  may  be  doubted,  however,  whether,  even  in  such  departments 
as  currency  and  banking,  simple  cases  are  so  easily  found  as  is  here  implied. 

''And  so  Adam  Smith  says,  "As  defence,  however,  is  of  much  more  importance 
than  opulence,  the  act  of  navigation  is,  perhaps,  the  wisest  of  all  the  commercial  regula- 
tions of  England."     "  Wealth  of  Nations,"  Bk.  IV.,  ch.  ii. 


THE  ACADEMIC   STUDY   OF   POLITICAL   ECONOMY  63 

liever  in  the  single  gold  standard  advocating,  in  the  present  state 
of  the  world,  international  bimetallism,  or  vice  versa.  It  is  com- 
mon, therefore,  to  hear  the  questions  of  legislation,  which  are  to 
be  determined  in  view  of  a  confused  mass  of  conditions,  perhaps 
not  closely  related  to  each  other,  spoken  of  as  "  simple  questions 
of  expediency,"  with  the  suggestion,  implied  if  not  expressed,  that 
economic  science  has  nothing  to  do  with  them.  Questions  of  ex- 
pediency alone  they  cannot  be,  for  they  all  involve  the  action  of 
economic  forces ;  but  they  undoubtedly  are  mixed  questions,  in- 
volving considerations  of  expediency,  it  may  be  of  highly  complex 
character,  and  therefore  not  to  be  determined  by  any  purely  scien- 
tific test.^ 

Here  we  reach  a  distinction  of  some  consequence  with  reference 
to  the  proper  treatment  of  the  great  disputed  questions.  The 
investigation  of  economic  law  is  a  strictly  scientific  inquiry,  as 
much  as  the  investigation  of  the  law  of  gravitation,  and  the  de- 
termination of  economic  law  falls  within  the  competence  of  the 
university.  Indeed,  one  of  the  great  objects  for  which  the  univer- 
sity exists  is  to  train  minds  for  such  inquiry  and  to  further  the 
advance  of  knowledge  in  precisely  such  obscure  departments. 
But  on  the  mixed  questions  of  legislative  policy  and  expediency, 
it  is  not  the  province  of  the  university  to  pronounce.  They  indeed 
involve  questions  of  science,  as  they  involve  much  else ;  but  their 
solution  is  not  an  act  of  the  scientific  judgment.  It  is,  on  the 
contrary,  an  act  of  the  political  judgment,  enlightened  by  the  aid 
of  economic  science,  of  jurisprudence,  of  the  study  of  human 
nature  itself,  or  whatever  else  may  serve  to  clear  up  the  matter 
in  hand.  The  historical  narratives  in  which  the  great  questions 
of  the  past  lie  embedded  are  no  doubt  objects  of  university  study, 
and  the  unravelling  of  their  tangled  threads  affords  a  valuable 
training,  by  means  of  a  subject-matter  of  unfailing  interest ;  but 
it  is  no  part  of  the  business  of  the  university  to  pronounce  ex 
cathedra  upon  the  policies  which  may  find  in  such  narratives  some 
illustration,  but  which  must  after  all  rest  upon  indeterminate  and 
probably  transitory  conditions.  So,  too,  the  great  financial  and 
industrial  questions  of  the  day  supply  the  best   of  material  for 

^  Compare  the  common  remark  that  "  freedom  of  trade  is  good  in  theory  but  not  in 
practice,"  which  is  a  manner  of  saying  that  conclusions,  scientifically  correct  in  the 
speaker's  opinion,  must  be  applied  with  careful  regard  to  extraneous  conditions. 


64  ESSAYS 

practice  in  the  analysis  of  complicated  problems  and  in  the  collect- 
ing and  weighing  of  evidence ;  but  in  all  this  it  is  the  acquisition 
of  power  in  the  dealing  with  problems,  and  not  the  solution  of  any- 
practical  question,  that  is  the  real  matter  in  hand.  The  university 
may,  and  if  successful  in  its  true  functions  will,  supply  scientific 
data  for  the  use  of  all  who  are  concerned  in  the  settlement  of 
legislative  and  administrative  questions ;  but,  when  to  these  data 
are  added  the  many  others  which  form  a  part  of  the  basis  for  all 
practical  decisions,  the  further  declaration  of  opinion  from  the 
university  chair  becomes  an  obiter  dictum,  not  necessary  in  the 
strict  performance  of  duty,  and  raising  some  difficult  questions  of 
expediency. 

The  distinction  here  taken  between  strict  scientific  questions 
and  mixed  questions  of  science  and  expediency,  it  is  true,  is  not 
usually  observed.  In  a  loose  use  of  language,  we  are  apt  to  speak 
of  any  question  involving  economics  as  an  economic  question,  and 
to  treat  it,  possibly  until  judgment  is  given  against  us,  as  some- 
thing to  be  settled  by  scientific  reasoning  alone.  But  is  there  one 
such  question  which  the  wise  legislator  will  dispose  of  in  this 
manner,  or  as  to  which  the  considerate  economist,  whether  in  the 
chair  or  out  of  it,  will  give  on  scientific  grounds  an  unreserved 
judgment.''  It  is  only  by  extending  the  definition  of  political 
economy  itself,  so  as  to  include  a  vast  region  of  politics  and  ethics, 
and  thus  destroying  the  possibility  of  all  scientific  precision,  that 
we  can  describe  as  economic  questions  a  great  mass  of  those  which 
commonly  pass  for  such.  This  confusion  of  boundaries  is  no  doubt 
often  ventured  upon,  and  with  the  eager  student  the  temptation 
to  it  must  always  exist.  Nevertheless,  the  line  between  political 
economy  and  the  allied  subjects  appears  to  be  drawn  by  reason 
and  necessity,  as  well  as  by  authority  ;  and,  being  drawn,  it  brings 
with  it  the  distinction  here  made  between  the  question  of  science 
and  those  of  practice.^ 

1  Professor  Marshall  observes  that  "  it  is  not  the  function  of  a  science  to  lay  down 
practical  precepts  or  to  prescribe  rules  of  life.  The  laws  of  economics,  as  of  other 
sciences,  are  couched  in  the  indicative,  and  not  in  the  imperative,  mood  :  tiicy  are 
statements  as  to  the  effects  produced  by  different  causes,  singly  or  in  combination. 
They  are  not  rules  ready  for  immediate  application  in  practical  politics."  And  in  a 
note,  remarking  upon  the  tendency  of  some  writers,  especially  in  P'rance,  to  enlarge  the 
scope  of  political  economy  so  as  to  make  it  include  practical  politics,  the  same  writer 
adds  :  "Of  course  an  economist  retains  the  liberty,  common  to  all  the  world,  of  express- 


THE   ACADEMIC   STUDY   OF   POLITICAL   ECONOMY  65 

The  teacher  of  political  economy  must  be  supposed,  however, 
as  has  already  been  remarked,  to  have  his  views  upon  the  questions 
which  lie  beyond  the  strict  Hmit  of  scientific  conclusions ;  and  as 
one  who  is  much  occupied  with  the  subject-matter  in  one  of  its 
aspects,  and  so  is  familiar  with  its  importance,  he  may  be  expected 
to  hold  his  opinions  with  strong  conviction  and  interest.  But,  in 
his  capacity  as  teacher,  is  he  to  express  these  opinions  or  to  with- 
hold them  ?  The  way  to  an  answer  to  this  question  may  be 
partially  cleared,  perhaps,  if  we  consider  the  general  relation  of 
instructor  and  student,  as  regards  their  respective  conclusions  upon 
the  subjects  of  their  study  in  common.  In  no  moral  science  is  there 
a  body  of  truths,  as  in  the  exact  sciences,  capable  of  demonstration 
by  a  process  which  shall  exclude  the  possibility  of  difference  of 
judgment  between  instructed  minds.  The  great  service  done  by 
the  instructor  in  moral  sciences  is,  as  has  been  said  above,  to  train 
the  mind  of  the  student  to  scientific  reasoning.  That  the  student 
should  learn  to  reason  truly  is  of  far  more  consequence  than  that 
he  should  perceive  and  accept  any  particular  truth ;  and  the  real 
success  of  the  instructor  is  found,  not  in  bringing  his  students  to 
think  exactly  as  he  does,  — which  is  unlikely  to  happen,  and  indeed 
unnatural, — but  in  teaching  them  to  use  their  own  faculties  ac- 
curately and  with  measured  confidence.  Even  within  the  strict 
bounds  of  science,  then,  the  instructor  is  little  concerned  with 
the  greater  or  less  uniformity  of  conclusion  among  his  students, 
and  is  not  properly  concerned  at  all  with  anything  like  the  propa- 
gation of  his  own  views.  He  is  interested  in  making  his  reasoning 
process  clearly  understood;  but  this  is  because  of  the  value  of  the 
logical  process  itself,  and  not  for  the  sake  of  producing  conviction 
in  the  particular  individuals  addressed.  There  is  no  duty  laid  upon 
the  instructor's  conscience  to  satisfy  every  doubt  and  to  inculcate 
certain  propositions  as  absolute  truth  ;  but  it  is  his  duty  to  show  how 
to  practise  clear  analysis  and  just  discrimination  in  scientific  reason- 
ing, and,  if  he  has  done  this  with  success,  he  may  well  be  content. 

And  when  we  come  to  the  questions  of  applied  economics,  the 
questions  in  which  science  and  political  expediency  both  have  their 

ing  his  opinion  that  a  certain  course  of  action  is  the  right  one  under  given  circumstances. 
And,  if  the  difficulties  of  the  problem  are  chiefly  economic,  he  may  speak  with  a  certain 
authority.     But  so  may  a  chemist  with  regard  to  other  problems,  and  yet  no  reasonable 
person  regards  the  laws  of  chemistry  as  precepts."     "  Principles  of  Economics,"  i.  89. 
F 


66  ESSAYS 

part,  we  come  to  a  class  of  possible  decisions  which,  according  to 
the  view  here  taken,  it  is  distinctly  the  duty  of  the  university  in- 
structor not  to  press  upon  his  students.  DeaUng  with  such  ques- 
tions, as  he  must  in  order  to  make  a  comprehensive  survey  of  his 
own  proper  field,  it  is  his  business  to  carefully  disentangle  the 
scientific  considerations  from  all  others,  and  to  show  their  limita- 
tion as  determined  by  the  supposed  conditions  which  underlie  the 
scientific  reasoning.  But  it  is  not  his  province  to  strike  the  balance 
between  all  the  conflicting  interests  and  arguments,  scientific, 
political,  and  ethical,  which  actually  present  themselves  for  con- 
sideration. Still  less  is  it  his  business  to  enforce  the  conclusions 
which,  upon  such  balance  being  struck,  appear  satisfactory  to  his 
own  mind ;  for  if  as  regards  the  questions  of  pure  science  he  has 
an  object  in  view  more  important  than  mere  conformity  of  belief 
even  in  the  best  established  truth,  still  more  on  the  debatable 
ground  must  he  give  a  subordinate  place  to  such  conformity. 
Indeed,  looking  solely  at  his  relation  as  instructor,  the  assent  of 
his  pupils  upon  questions  outside  of  the  scientific  range  becomes 
as  irrelevant  as  their  agreement  with  his  preferences  in  party 
politics  or  with  his  religious  beliefs. 

This,  however,  is  not  the  same  thing  as  to  say  that  the  instructor 
should  suppress  his  opinions  on  the  class  of  mixed  questions  now 
in  view.  His  dignity  may  forbid  a  course  which  might  be  inter- 
preted as  concealment ;  and  there  are,  moreover,  few  men  whose 
weight  of  authority  is  such  as  to  compel  any  extraordinary  caution 
in  the  declaration  of  their  minds.  As  a  citizen,  taking  his  part  in 
the  affairs  of  the  community,  the  instructor  has  occasion  to  form 
opinions  and  to  act  upon  them  ;  and  it  is  his  right  in  that  relation 
to  do  what  he  may  to  lead  others  to  act  with  him.  In  the  univer- 
sity, however,  he  is  under  other  obligations ;  and  there  it  is  for  him 
to  decide,  how  far,  with  his  habit  of  mind  and  his  temperament,  he 
can  give  expression  to  judgments  lying  beyond  his  proper  sphere, 
and  yet  related  to  it,  without  injury  to  the  severe  neutrality  of  sci- 
ence which  he  is  bound  to  preserve  within  that  sphere.  It  may 
well  be  that  no  two  men  could  follow  with  advantage  the  same  rule 
in  this  respect.  It  has  sometimes  been  said  of  this  or  that  teacher 
of  economics,  in  the  friendly  comment  of  former  pupils,  that  after 
long  intercourse  the  teacher's  opinion  upon  some  great  question  of 
the  day  was  still  unknown  to  the  pupil.     The  bearing  of  such  com- 


__t 


THE   ACADEMIC   STUDY   OF   POLITICAL  ECONOMY  67 

ments  is  equivocal,  depending  very  likely  upon  conditions  of  which 
no  observer,  however  close,  can  judge.  If  the  teacher's  silence  as 
to  his  own  opinion  was  the  result  of  fear  of  misconstruction  or 
dread  of  controversy,  his  timidity  deserved  small  praise.  If  he 
was  silent  because  this  appeared  to  him  the  only  way  to  preserve 
the  judicial  attitude  prescribed  by  his  position,  he  may  have  laid 
down  a  stricter  rule  for  himself  than  was  necessary,  and  so,  after 
all,  may  not  have  attained  the  highest  success.  If  he  was  silent 
because  the  importance  of  holding  his  students  to  strictly  scientific 
analysis  and  deduction,  in  which  they  would  find  their  best  training 
and  most  solid  results,  was  always  uppermost  in  his  mind,  and 
because  any  individual  opinion  upon  questions  of  a  secondary  order 
was  therefore  unimportant  for  his  purpose  and  as  it  were  intrusive, 
then,  indeed,  the  comment  is  complimentary.  But  it  is  only  the 
teacher  himself  who  can  determine  whether  it  really  does  thus 
mark  the  self-forgetful  devotion  of  his  best  powers. 


RICARDO'S   USE   OF   FACTS  i 

In  the  current  criticism  of  the  economists  of  the  old  school, 
frequent  mention  is  naturally  made  of  what  is  understood  to  be 
Ricardo's  fondness  for  mere  theorizing.  In  a  general  way,  it  is 
admitted  that  he  was  a  man  of  affairs ;  but,  as  a  writer  upon 
economics,  he  seems  to  his  critics,  and  no  doubt  to  a  large  part  of 
his  readers,  like  a  man  writing  in  a  cave,  the  course  of  his  thoughts 
not  being  at  all  affected  by  the  actual  transactions  of  life.  And 
yet  he  did  himself  suppose  that  facts  had  their  part  in  determining 
his  conclusions.  He  expresses  the  hope,  in  the  preface  of  his 
principal  work,  that  it  will  not  be  deemed  presumptuous  in  him  to 
state  his  opinions  upon  the  questions  therein  treated,  after  having 
given  his  best  consideration  to  the  subject,  after  the  aid  derived 
from  some  eminent  writers,  **  and  after  the  valuable  experience 
which  a  few  late  years,  abounding  in  facts,  have  yielded  to  the 
present  generation."  Nevertheless,  in  the  treatise  which  follows, 
facts  are  rarely  cited  in  proof  or  otherwise  ;  and  even  the  illustra- 
tions are  imagined  cases  put  by  the  writer. 

This  characteristic  of  Ricardo's  treatise  is  best  explained  by 
recalling  the  circumstances  under  which  the  book  was  written  and 
published.  It  is  now  before  the  world  as  the  author's  formal 
exposition  of  his  system ;  and,  as  an  exposition,  it  confessedly 
leaves  much  to  be  desired.  But  it  is  to  be  remembered  that  it  is  at 
least  doubtful  whether  the  author  originally  wrote  for  publication. 
McCulloch's  statement,  probably  made  upon  the  best  information, 
is  express,  that  Ricardo  hesitated  to  publish,  and  was  unwilling 
thus  to  risk  a  high  reputation.  "  Ultimately,  however,  he  was 
prevailed  upon,  by  the  entreaties  of  his  friends,  to  allow  his  work 
to  be  sent  to  the  press."  ^  That  James  Mill  was  one  of  these 
persuasive   friends,   we   have  upon   the  authority  of  John   Stuart 

1  Quarterly  Journal  of  Economics,  ']\x\'^,  1887. 

2  See  also  Annual  Biography,  1824,  p.  374. 

68 


RICARDO'S   USE   OF   FACTS  69 

Mill,  who  speaks  in  his  "Autobiography  "  of  Ricardo's  work  as  "  a 
book  which  never  would  have  been  published  or  written  but  for 
the  entreaty  and  strong  encouragement  of  my  father ;  for  Ricardo, 
the  most  modest  of  men,  though  firmly  convinced  of  the  truth  of 
his  doctrines,  deemed  himself  so  little  capable  of  doing  them  justice 
in  exposition  and  expression  that  he  shrank  from  the  idea  of  pub- 
licity." 

It  appears  from  these  notices  not  unlikely  that  Ricardo's  book 
was  written,  not  for  the  public  eye,  but  as  a  statement  of  opinions 
made  for  his  own  purposes,  and  that  its  publication  was  an  after- 
thought of  his  friends.  And  this  view  of  the  case  is  confirmed  by 
the  structure  of  the  book  itself,  which  is  a  series  of  monographs 
scattered  over  the  field  of  political  economy,  such  as  a  thoughtful 
man  might  commit  to  writing  when  clarifying  his  own  ideas  on  the 
subject,  but  is  by  no  means  a  systematic  exposition,  even  such  as 
a  writer  of  so  little  rhetorical  pretension  as  Ricardo  might  be 
expected  to  produce.  This  appearance  of  being  a  fragmentary 
collection  of  essays  is  even  more  strongly  marked  in  the  original 
edition  than  in  the  later  ones,  to  which  the  author  was  induced  to 
make  some  important  additions. 

Writing,  probably,  with  little  reference  to  any  large  circle  of 
readers,  Ricardo  contents  himself  in  these  irregularly  connected 
chapters  with  a  simple  statement  of  the  operation  of  causes.  He 
may  here  and  there  refer  to  an  historical  case  in  which  a  cause 
discerned  by  him  operated ;  but  such  reference  is  not  necessary 
for  his  present  purpose,  and  is  made  by  exception,  and  not  upon 
system.  If  he  wishes  to  illustrate,  he  finds  it  easier  to  frame  a 
case,  as  men  will  do  in  discussion  nine  times  out  of  ten,  by  saying, 
"Suppose  a  commodity  of  1000/.  value  rises  to  1200/.,  or  falls  to 
800/.,"  and  so  on.  "  My  object,"  he  says,  "  was  to  elucidate  princi- 
ples ;  and,  to  do  this,  I  imagined  strong  cases,  that  I  might  show 
the  operation  of  these  principles."  ^ 

But,  in  his  pamphlets,  Ricardo  was  generally  writing  for  a  dif- 
ferent purpose,  and  with  distinct  reference  to  the  reading  public. 
The  occasion  required  a  different  method  of  treatment,  and  thus 
a  certain  sidelight,  as  it  were,  is  thrown  upon  his  mental  processes 
and  his  equipment  for  discussion.  The  range  of  subjects  covered 
by  his  pamphlets  is  limited  to  the  currency  and  to  free  trade  in 

^  See  Ricardo's  letter  in  the  Edinburgh  Review,  January,  1837,  cited  by  Bonar. 


70  ESSAYS 

corn,  these  being  the  questions  which  pressed  the  hardest  upon 
English  economists  in  the  fourteen  years  of  his  activity;  but  the 
method  pursued  is  significant.  In  his  principal  work,  his  discus- 
sion of  money  and  the  allied  topics,  and  of  all  that  bears  on  the 
effects  of  free  corn,  is  of  the  same  cast  as  his  discussion  of  other 
subjects.  We  have  the  same  severely  logical  statement  of  abstract 
principles  and  the  same  use  of  imagined  cases  for  illustration,  with 
nothing  whatever  to  show  any  special  study  of  facts  or  acquaint- 
ance with  practical  affairs.  In  the  various  pamphlets  on  the  cur- 
rency, however,  and  in  that  on  protection  to  agriculture,  which  is 
the  practical  sequel  of  an  earlier  theoretical  essay  on  the  effects 
of  a  low  price  of  corn,  he  shows  that  behind  the  abstract  discus- 
sions of  his  book  lay  a  great  reserve  of  facts  and  observations,  ready 
to  be  drawn  upon  whenever  the  task  in  hand  seemed  to  require. 
The  same  thing  is  true  of  his  many  speeches  in  Parliament,  as 
reported  in  Hansard  from  1819  to  1823.  The  subjects  of  the 
speeches  are  chiefly  connected  with  the  currency,  the  national 
debt,  taxation,  and  agricultural  distress.  But  the  discussion 
throughout  rests  upon  the  knowledge  of  a  keen-sighted  and 
experienced  observer,  skilled  in  the  scientific  interpretation  of 
phenomena.  So  far  is  he  in  these  speeches  from  neglecting  fact 
for  theory,  that  it  would  be  easy  to  cite  important  cases  in  which 
he  went  beyond  the  opinion  of  the  House,  by  sacrificing  the  close 
application  of  theory  in  deference  to  the  unusual  conditions  then 
affecting  important  questions. 

With  regard,  then,  to  questions  which  Ricardo  had  occasion  to 
treat  before  an  audience  or  for  a  considerable  circle  of  readers,  we 
find  that  he  was  thoroughly  equipped,  and  that  he  made  ample  use 
of  facts  for  illustration,  verification,  or  the  premises  for  argument, 
although,  in  his  chief  work,  the  same  questions  are  treated  w^th  a 
singular  exclusion  of  all  reference  to  the  actual  world  around  him. 
It  is  fair  to  assume,  then,  that  under  like  circumstances  he  would 
have  treated  other  questions  also  in  the  same  practical  way ;  and 
that  what  appears  in  his  treatise  as  a  complete  separation  of  theory 
and  fact  does  not  indicate  the  mental  habit  of  the  author  or  the 
limit  of  his  resources,  but  is  only  the  peculiar  cast  given  to  the 
treatise  by  the  special  circumstances  of  its  composition. 


SOME   PRECEDENTS   FOLLOWED    BY   ALEXANDER 

HAMILTON  1 

The  system  of  finance  established  under  Alexander  Hamilton's 
administration  of  the  Treasury  of  the  United  States  has  been 
represented  as  a  slavish  imitation  of  the  English  system  or  as  an 
astonishing  piece  of  original  invention,  according  to  the  political 
leanings  of  the  critic.  In  the  following  pages  the  present  writer 
proposes  to  consider  the  apparent  origin  of  some  parts  of  Hamil- 
ton's work,  and  incidentally  to  observe  the  light  which  is  thus 
thrown  upon  these  conflicting  allegations  of  imitation  and 
originality. 

It  is  worth  while  to  remark  at  the  start  that,  under  the  early 
practice  of  our  government,  the  Secretary  of  the  Treasury  occu- 
pied a  position  more  nearly  like  that  of  an  English  Chancellor  of 
the  Exchequer  than  the  present  spirit  of  Congress  would  allow. 
The  arrangements  for  securing  his  responsibility^  were  defective; 
but  the  responsibility  itself,  not  only  for  administration,  but  for 
guiding  the  course  of  legislation,  was  recognized.  The  early  com- 
munications of  the  Secretary  to  Congress  often  presented  some- 
thing like  a  budget,  with  a  statement  of  the  measures  necessary 
for  its  working,  and  any  new  proposition  became  a  government 
measure.  The  method  began  almost  from  the  first  to  show  its 
incompatibility  with  the  thorough  separation  of  legislative  and 
executive  functions  aimed  at  in  many  of  our  arrangements ;  but, 
nevertheless,  it  made  the  financial  system  with  which  the  govern- 
ment set  out  substantially  Hamilton's  system,  as  Congress  expected 
and  intended. 

1  Quarterly  Jotirnal  of  Econojfiics,  Octohtr,  1 888. 

2  Madison  stated  the  nature  of  the  responsibility  as  follows  :  "  There  will  be  responsi- 
bility in  point  of  reputation,  at  least  a  responsibility  to  the  public  opinion  with  respect 
to  his  abilities  ;  and  supposing  there  is  no  personal  responsibility,  yet  we  know  that 
men  of  talents  and  ability  take  as  much  care  for  the  preservation  of  their  reputation  as 
any  other  species  of  property  of  which  they  are  possessed."  Annals  of  Congress,  June 
25,  17S9. 

71 


72  ESSAYS 

The  purpose  of  Congress  to  throw  upon  the  Secretary  the 
burden  of  shaping  the  financial  course  of  the  government  appears 
in  the  first  steps  taken  on  the  subject  of  public  credit.  The  act 
establishing  the  Treasury  Department  became  a  law  on  the  2d 
of  September,  1789;  and  the  nomination  of  Hamilton  as  Secretary 
went  to  the  Senate  on  the  iith.^  The  demand  for  action  "for 
the  revival  of  public  credit  and  the  advancement  of  the  national 
honor"  had  already  been  brought  before  the  House  by  the  peti- 
tion of  public  creditors  living  in  Pennsylvania ;  ^  and  their  petition, 
on  the  day  when  the  Treasury  bill  became  a  law,  was  referred  to 
a  committee,  consisting  of  Madison,  Vining,  and  Boudinot.  This 
committee  contented  itself  with  recommending  a  mere  declaratory 
resolution  that  provision  for  the  national  creditors  was  necessary, 
and  that  the  subject  should  be  considered  at  the  next  session. 
When  this  report  came  before  the  House,  however,  on  the  21st 
of  September,  a  resolution  was  added  and  adopted,  directing  the 
Secretary  of  the  Treasury  to  prepare  a  plan  and  report  it  to  the 
House  "at  its  next  meeting."  That  this  addition  was  made  as 
the  result  of  some  consultation  and  settled  pohcy  is  made  probable 
by  the  adoption  at  the  same  time  of  a  new  resolution,  directing 
the  Secretary  to  apply  to  the  executives  of  the  several  states  for 
statements  of  their  public  debts  and  the  amount  of  securities  of 
the  United  States  held  by  them,  and  to  report  the  information  to 
the  House  at  the  next  session,  plainly  contemplating  the  possible 
assumption  of  state  debts  as  a  part  of  the  plan  of  finance  to  be 
prepared.  Without  entering  upon  this  vexed  subject,  however, 
it  is  enough  now  to  point  out  the  specific  demand  thus  made 
upon  Hamilton  for  a  comprehensive  scheme,  just  ten  days  after 
his  appointment  as  Secretary.  This  was  the  contemporaneous 
interpretation  of  the  clause  in  the  Treasury  act,  which  declares  it 
to  be  "  the  duty  of  the  Secretary  of  the  Treasury  to  digest  and 
prepare  plans  for  the  improvement  and  management  of  the 
revenue  and  for  the  support  of  the  public  credit." 

1  As  early  as  May  27,  Madison  thought  that,  when  the  department  should  be  estab- 
lished, the  Secretary  would  be  Jay  or  Hamilton,  and  that  "the  latter  is,  perhaps,  best 
qualified  for  that  species  of  business";  and  June  30  he  wrote  that  "Hamilton  is  most 
talked  of."     "  Letters  and  Writings  of  Madison,"  i.  472,  484. 

*  See  Anttals  of  Congress,  August  28,  1789.  The  majority  of  these  petitioners  joined 
the  next  year  in  a  remonstrance  against  the  funding  act.  "  American  State  Papers, 
Finance,  "  i.  76. 


PRECEDENTS   FOLLOWED   BY   ALEXANDER   HAMILTON       73 

When  Hamilton,  in  accordance  with  this  resolution,  took  up 
the  problem  of  creating  public  credit,  with  all  that  such  creation 
implied,  he  was  barely  thirty-two  years  old.  He  cannot  be  said 
to  have  had  any  special  training  for  finance.  He  had  been  a 
reader  on  economic  and  financial  subjects,  had  been  an  interested 
observer  of  financial  measures,  had  taken  some  share  in  financial 
discussion,  and  had  undergone  the  rapid  educational  process  to 
which  practical  politics  always  subject  the  statesman.  In  his 
case,  with  his  marked  natural  capacity  and  his  good  equipment 
of  learning,  this  process  had  no  doubt  carried  him  far ;  but  his 
experience  had  never  reached  the  actual  management  of  affairs 
on  a  large  scale,  as  scales  were  measured  in  those  days,  nor  the 
shaping  of  important  financial  legislation.  He  took  up  his  prob- 
lem, then,  as  a  public  man  often  must,  relying  upon  his  general 
training,  observation,  and  judgment  to  lead  him  to  a  safe  conclu- 
sion. It  appears  certain  that  he  relied  upon  no  adviser  better 
versed  than  himself  in  practical  affairs.  He  appears  to  have 
made  a  few  inquiries  of  a  general  kind,  not  suggestive  of  his  own 
purposes  ;  ^  but  there  is  a  strong  probability  that  his  own  mind 
was  made  up  early  as  to  some  leading  features  of  his  scheme,  and 
that  the  friends  finally  taken  into  his  confidence  were  not  invited 
to  share  the  responsibility  of  devising  and  deciding.^ 

It  is  a  strong  proof  of  the  sobriety  of  Hamilton's  judgment 
that,  in  determining  his  course  under  these  circumstances,  he 
sought  for  the  most  part  to  adapt  to  his  purpose  methods  and 
agencies  which  had  been  tested  by  experience  ;  for  that  is  the 
great  characteristic  of  his  "  Reports  on  Public  Credit  and  on  a 
National  Bank."  There  is  little  of  the  effort  to  invent  or  to  work 
out  theories  leading  to  some  novel  expedient,  by  which  an  ambi- 
tious man  so  often  seeks  to  exhibit  his  originality  of  device  and 
improve  his  chance  for  fame.  On  the  contrary,  Hamilton  sel- 
dom shows  a  disposition  to  go  beyond  the  range  of  already  tried 

1  For  example,  see  his  letter  to  Madison,  October  12,  17S9,  in  Hamilton's  "  Life  of 
Alexander  Hamilton,"  iv.  60. 

2  It  is  to  be  noticed  that  Wolcott,  although  in  the  Treasury,  writes  to  his  father 
November  3,  1789,  "  What  arrangements  are  in  contemplation  with  respect  to  the  public 
debt,  I  have  not  been  able  to  learn  ;  "  and  as  late  as  January  10,  1790,  when  Hamilton's 
plan  was  waiting  to  be  presented  to  the  House,  Wolcott  seems  not  to  have  been  well  in- 
formed as  to  the  rate  of  interest  to  be  proposed.  Gibbs,  "Administrations  of  Washing- 
ton and  Adams,"  i.  23,  35. 


74 


ESSAYS 


expedients,  except  when  required  to  do  so  by  the  conditions  of  his 
task.  His  fondness  for  disquisition,  perhaps,  in  a  measure  justi- 
fies Mr.  Adams's  reference  to  his  published  documents  as  "  essays 
which,  under  the  name  of  reports,  instilled  much  sound  knowl- 
edge, besides  some  that  was  not  so  sound,  into  the  minds  of 
legislature  and  people."^  He  had,  moreover,  great  fertility  in 
ingenious  intricacies  and  fondness  for  them,  as  was  shown  in 
several  of  his  later  and  subordinate  financial  propositionr  But, 
in  laying  down  his  general  plan  for  a  financial  system,  he  appears 
to  have  held  his  natural  tendency  in  check  for  the  most  part,  and 
to  have  acted  with  a  consciousness  that  the  matter  in  hand  was 
too  grave  and  its  relations  too  comprehensive  to  allow  him  to 
travel  freely  beyond  the  line  of  tried  and  known  expedients. 

And  this  explains  his  steady  reliance  upon  the  results  of 
English  experience.  At  that  day,  the  statesman  who  looked  for 
example  to  guide  him  in  finance  could  hardly  find  it  anywhere 
except  in  English  or  Dutch  methods.  France,  after  a  long  course 
of  folly,  had  declared  her  bankruptcy  in  the  year  in  which  Hamil- 
ton's administration  began.  Spain  could  give  no  lessons  except 
in  the  squandering  of  great  opportunities  and  resources.  Russia 
and  Austria  were  both  struggling  with  inconvertible  paper  and 
financial  discredit  and  distress.  The  smaller  states  of  Germany 
and  Italy  neither  had  important  results  to  show  nor  were  much 
known.  And,  of  the  two  most  familiar  and  most  instructive  cases, 
there  can  be  no  doubt  that  the  experience  of  Holland  was  in  most 
respects  less  likely  to  be  applicable  to  the  conditions  of  the 
United  States  than  that  of  England.  Unless,  then,  the  financial 
organizer  were  resolved  to  disregard  the  lessons  to  be  learned 
from  foreign  finance,  he  must  of  necessity  draw  those  lessons 
chiefly  from  English  practice.  What  Hamilton's  favorite  study 
would  have  been  if  France  had  been  financially  as  fortunate  as 
England,  we  need  not  inquire.  France  had  not  been  thus  fortu- 
nate, and  even  an  Anglophobist  could  have  looked  in  but  one 
direction  under  the  circumstances. 

The  features  of  Hamilton's  scheme  which  we  may  advan- 
tageously compare  therefore  with  the  EngHsh  precedents  are  his 
scheme  for  funding  the  debt  in  order  to  determine  and  moderate 
its  immediate  burden,  his  plan  for  a  sinking  fund,  and  the  charter 

1  Henry  Adams,  "Life  of  Albert  Gallatin,"  p.  268. 


PRECEDENTS   FOLLOWED    BY   ALEXANDER   HAMILTON       75 

of  the  first  Bank  of  the  United  States.  These  measures  stand 
together,  as  those  by  which  the  pubHc  obhgations  were  to  be 
defined  and  met,  and  national  and  private  interests  were  to  be 
united  for  mutual  support.  The  assumption  of  the  state  debts 
and  the  settlement  of  accounts  with  the  several  states  also  held 
an  important  place  in  the  system,  but  the  considerations  involved 
were  so  special  that  these  measures  do  not  fall  within  the  range 
of  our  inquiry.  The  system  of  credit  also  rested  upon  the  hope 
of  a  sufficient  provision  of  revenue;  but  this  Hamilton  sought 
wherever  he  could  find  it,  and  under  such  limitations  in  the 
choice  of  his  measures  as  made  their  origin  a  matter  of  little 
significance. 

Taking  up  first  in  order  the  plan  for  funding  the  domestic  debt, 
proposed  by  Hamilton  in  the  "  Report  on  PubHc  Credit "  of  Janu- 
ary 9,  1790,  we  have  the  measure  which  was  declared  to  be  de- 
vised for  the  purpose  of  mystifying  the  public  and  estabUshing  a 
perpetual  debt  in  imitation  of  what  was  understood  to  be  the 
English  policy.  Premising  that  the  Secretary  assumed  as  probable 
that  the  interest  of  money  in  the  United  States  "  will,  in  five  years, 
fall  to  five  per  cent,  and  in  twenty  to  four,"  he  proposed  to  fund 
the  heterogeneous  mass  of  securities  and  claims,  which  made  up 
the  domestic  debt,  as  follows  :  — 

First.  —  That  for  every  hundred  dollars  subscribed,  payable  in  the  debt  (as 
well  interest  as  principal),  the  subscriber  be  entitled,  at  his  option,  either 

[i]  To  have  two-thirds  funded  at  an  annuity  or  yearly  interest  of  six  per 
cent,  redeemable  at  the  pleasure  of  the  government  by  payment  of  the  principal, 
and  to  receive  the  other  third  in  lands  in  the  Western  Territory,  at  the  rate  of 
twenty  cents  per  acre  ;  or, 

[2]  To  have  the  whole  sum  funded  at  an  annuity  or  yearly  interest  of  four  per 
cent,  irredeemable  by  any  payment  exceeding  five  dollars  per  annum,  on  account 
both  of  principal  and  interest,  and  to  receive,  as  a  compensation  for  the  reduction 
of  interest,  fifteen  dollars  and  eighty  cents,  payable  in  lands,  as  in  the  preceding 
case ;  or, 

[3]  To  have  sixty-six  dollars  and  two-thirds  of  a  dollar  funded  immediately 
at  an  annuity  or  yearly  interest  of  six  per  cent,  irredeemable  by  any  payment  ex- 
ceeding four  dollars  and  two-thirds  of  a  dollar  per  annum,  on  account  both  of 
principal  and  interest,  and  to  have,  at  the  end  of  ten  years,  twenty-six  dollars  and 
eighty-eight  cents  funded  at  the  like  interest  and  rate  of  redemption ;  or, 

[4]  To  have  an  annuity,  for  the  remainder  of  life,  upon  the  contingency  of 
living  to  a  given  age,  not  less  distant  than  ten  years,  computing  interest  at  four 
per  cent ;  or. 


ye  ESSAYS 

[5]  To  have  an  annuity  for  the  remainder  of  life,  upon  the  contingency  of 
the  survivorship  of  the  younger  of  two  persons,  computing  interest  in  this  case 
also  at  four  per  cent. 

In  addition  to  the  foregoing  loan,  payable  wholly  in  the  debt,  the  Secretary 
would  propose  that  one  should  be  opened  for  ten  millions  of  dollars  on  the  follow- 
ing plan : 

[6]  That,  for  every  hundred  dollars  subscribed,  payable  one-half  in  specie 
and  the  other  half  in  debt  (as  well  principal  as  interest),  the  subscriber  be  en- 
titled to  an  annuity  or  yearly  interest  of  five  per  cent,  irredeemable  by  any  pay- 
ment exceeding  six  dollars  per  annum,  on  account  both  of  principal  and  interest.^ 

No  doubt  the  appearance  of  great  complication  is  given  to  this 
scheme  by  the  ingenious  arrangement  for  leaving  to  the  creditor 
his  choice  between  several  methods  of  funding,  equivalent  in  value, 
but  having  different  attractions  for  the  investor.  With  a  domestic 
money  market  as  yet  untried  and  with  public  credit  still  to  be 
created,  it  may  well  have  appeared  dangerous  to  Hamilton  at  the 
end  of  1789  to  stake  his  success  upon  the  possible  popularity  of 
any  single  form  of  investment.  Still  there  can  be  no  doubt  that 
Congress  judged  wisely  in  rejecting  this  part  of  his  scheme  and  in 
adopting  a  method  of  funding  based  on  his  third  proposition.^  The 
bolder  course  of  proposing  uniform  terms  of  exchange  to  all  the 
creditors  proved  to  be  free  from  the  risk  which  Hamilton  sought 
to  avoid,  the  form  of  securities  adopted  proved  to  be  satisfactory 
to  investors,  and  the  number  of  classes  of  new  securities  to  be 
created  was  somewhat  reduced.  The  proposition  as  given  above 
remains  a  striking  instance  of  Hamilton's  chief  foible  as  a  finan- 
cier —  his  fondness  for  ingenious  and  nicely  calculated  expedients, 
sometimes  admirable  as  mathematical  tours  de  force,  but  elaborated 
beyond  the  real  needs  of  the  occasion. 

Taking  the  first  three  of  Hamilton's  propositions,  there  is  little 
in  them  to  remind  us  strongly  of  the  English  precedents,  except 
the  use  which  is  made  of  variety  in  the  terms  of  redemption.  The 
English  legislation  had  already  made  the  three  per  cent  consols 
and  the  reduced  three  per  cents  redeemable  at  par  upon  a  year's 
notice.  The  four  per  cents  had  been  irredeemable  for  ten  years,  and 
the  fives  for  thirty.  As  a  refinement  upon  this  variation  in  time, 
Hamilton  fixed  a  limit  to  the  rate  of  redemption,  guaranteeing 
the  creditor  against  payment  except  by  small  instalments,  instead 
of  securing  him  against  payment  for  a  definite  time.     This   limit 

^  "American  State  Papers,  Finance,"  i.  20,         ^  Senate  Journal,  July  16,  1790. 


PRECEDENTS    FOLLOWED    BY    ALEXANDER    HAMILTON        jy 

upon  redemption  Hamilton  used  to  increase  the  weight  of  his  offers, 
as  English  financiers  had  used  the  limit  of  years ;  and  Congress 
adopted  it  for  the  first  and  last  time  in  the  Funding  Act  of  1790,^ 
when  they  gave  the  creditor  (i)  for  his  principal  two-thirds  in  six 
per  cents  bearing  present  interest,  and  one-third  in  sixes  not  bearing 
interest  until  1801,  neither  series  being  redeemable  except  by  pay- 
ments limited  to  eight  per  cent  for  principal  and  interest  in  any 
one  year,  and  (2)  for  his  interest  three  per  cents  redeemable  at 
pleasure. 

Whether  Hamilton  adopted  from  any  quarter,  or  indeed  main- 
tained at  all,  a  policy  of  permanent  public  debt,  is  a  question  which 
it  is  convenient  to  postpone  for  the  present.  So  far  as  the  terms 
of  redemption  proposed  by  him  bear  upon  this  point,  however,  it 
may  be  said  here  that  his  first  proposition  was  for  a  security  per- 
petual in  the  sense  in  which  the  larger  part  of  the  English  funded 
debt  was  perpetual,  having  no  fixed  time  for  maturity,  but  redeem- 
able whenever  the  government  might  find  redemption  convenient, 
—  temporary  or  perpetual  therefore  according  to  the  financial 
strength  of  the  debtor.  Of  the  securities  redeemable  at  a  limited 
rate,  described  in  his  second  and  third  propositions,  his  four  per 
cents  had  the  longest  life  secured  to  them  ;  and  these,  if  redeemed 
by  a  series  of  annual  payments  of  five  per  cent  for  principal  and 
interest,  would  last  for  forty-one  years  from  the  beginning  of  the 
series,  calculating  the  interest  at  four  per  cent  for  the  whole 
period. 

When  we  come,  however,  to  Hamilton's  fourth  and  fifth  propo- 
sitions, we  have  plainly  an  expedient  drawn  from  the  Hfe  annuity 
system,  which  the  English  government  had  used  as  a  method  of 
borrowing  at  intervals  from  the  time  of  WiUiam  HI.,  and  which 
the  Dutch  government  had  practised  still  earlier.  Here,  again, 
Congress  acted  wisely  in  avoiding  a  plan  better  adapted  to  the 
habits  and  wants  of  an  old  community  than  to  those  cf  a  country 
just  emerging  from  colonial  and  frontier  life  ;  and  the  proposition 
stands  as  an  additional  proof  of  the  tentative  character  of  Hamil- 
ton's early  propositions  and  the  difficulty  which  he  found  in  fixing 
his  judgment  as  to  the  nature  and  demands  of  the  coming  money 
market,  on  which  the  fate  of  his  effort  to  establish  public  credit 
must  depend. 

1  Act  of  August  4,  1790,  "Statutes  at  Large,"  i.  138. 


78  ESSAYS 

The  least  creditable  of  Hamilton's  propositions  is  that  in  which, 
"  as  an  auxiliary  expedient,"  he  proposed  a  loan  on  the  plan  of  a 
tontine,  with  the  right  of  survivorship  among  those  entitled  to  the 
annual  payments  :  — 

To  consist  of  six  classes,  composed  respectively  of  persons  of  the  following 
ages : — 

First  class,  of  those  of  20  years  and  under. 

Second  class,  of  those  above  20,  and  not  exceeding  30. 

Third  class,  of  those  above  30,  and  not  exceeding  40. 

Fourth  class,  of  those  above  40,  and  not  exceeding  50. 

Fifth  class,  of  those  above  50,  and  not  exceeding  60. 

Sixth  class,  of  those  above  60. 

Each  share  to  be  two  hundred  dollars  ;  the  number  of  shares  in  each  class  to 
be  indefinite.  Persons  to  be  at  liberty  to  subscribe  on  their  own  lives,  or  on 
those  of  others  nominated  by  them. 

The  annuity  upon  a  share  in  the  first  class,  to  be $8.40 

Upon  a  share  in  the  second,     .         .         .         .         .         .         .         .         .8.65 

Upon  a  share  in  the  third,         .........       9.00 

Upon  a  share  in  the  fourth,       .........       9.65 

Upon  a  share  in  the  fifth,  .........     10.70 

Upon  a  share  in  the  sixth,         .........     12.80 

The  annuities  of  those  who  die  to  be  equally  divided  among  the  survivors, 
until  four-fifths  shall  be  dead,  when  the  principle  of  survivorship  shall  cease,  and 
each  annuitant  thenceforth  enjoy  his  dividend  as  a  several  annuity  during  the  life 
upon  which  it  shall  depend.^ 

No  action  was  taken  by  Congress  upon  this  ill-advised  scheme; 
but  it  is  important  to  observe  that  its  details  appear  to  have  been 
adjusted  upon  the  plan  of  the  English  tontine  of  1789,  which  had 
been  brought  out  by  Mr.  Pitt  a  few  months  before  the  date  of 
Hamilton's  report.^  The  classification  of  subscribers  is  the  same 
in  the  two,  differing  from  either  of  the  other  English  tontines  and 
from  the  Irish  and  French  as  well.^     In  short,  it  appears  that,  in 

^  "State  Papers,  Finance,"  i.  21. 

2  On  June  10,  1789.     See  "Parliamentary  Plistory,"  xxviii.  161. 

^  The  English  tontine  of  1789  was  under  the  act  of  29  George  III.,  c.  41.  A  pay- 
ment appears  to  have  been  made  to  one  survivor  in  the  fiscal  year  1887-1888,  according  to 
"Finance  Accounts"  (in  Pari.  Doc,  1888),  p.  42. 

The  annuities  p-oposed  by  Hamilton  were  somewhat  higher  for  classes  four,  five,  and 
six  than  those  in  tbi  English  scheme.  This  change  was  probably  made  because  the 
terms  of  the  English  tontine  were  found  not  to  be  sufficiently  attractive,  so  that  the  sub- 
scription was  not  filled.  See  for  this  and  other  English  and  Irish  tontines,  "  Report  on 
Public  Income  and  Expenditure"  (Pari.  Doc,  1869),  ii.  571 ;  for  the  French  cases, 
Leroy-lkaulieu,  "Science  des  Finances,"  ii.  288  [ist  ed.]. 


PRECEDENTS    FOLLOWED    BY   ALEXANDER    HAMILTON        79 

his  uncertainty  as  to  the  kind  of  investments  which  would  prove 
acceptable  in  the  United  States,  Hamilton  here  grasped  at  the 
freshest  expedient  brought  to  him  by  his  foreign  advices,  commit- 
ting himself  to  a  proposition  which  shows  little  of  the  business-like 
calculation  found  in  most  of  his  recommendations  to  Congress. 

It  was  no  doubt  a  common  belief  among  Hamilton's  opponents 
that,  in  shaping  these  propositions,  he  had  devised  a  scheme  which 
threatened  the  country  with  a  perpetual  debt.  This,  it  was  charged, 
was  the  natural  result  of  a  weak  deference  to  English  precedent 
and  of  political  theories  of  English  origin,  which  looked  to  the 
strengthening  of  the  central  government  by  all  possible  influences, 
whether  pure  or  mercenary.^  That  the  concentration  of  debt  and 
of  revenue  under  federal  authority  would  give  instant  support  to 
the  general  policy  of  Hamilton  and  his  party  there  was  no  pre- 
tence of  denying,  and  it  was  perhaps  natural  that  the  opposition 
should  believe  that  a  debt  which  was  used  to  strengthen  the  gov- 
ernment at  the  outset  would  be  treated  as  one  of  its  permanent 
buttresses.  The  magnitude  of  the  funding  operation  tended  to 
confirm  this  idea.  That  Hamilton's  opponents  had  no  definite 
counter-proposition  2  appears  to  have  been  due  in  great  measure 
to  the  belief  sometimes  expressed,  and  sometimes  tacitly  operative, 
that  the  debt  weighing  upon  the  general  and  state  governments 
together  was  too  great  to  be  dealt  with.  To  fund  the  debts  of  the 
Confederation  at  their  face,  without  any  attempt  at  scaling  them 
down,  and  to  assume  a  great  mass  of  debts  incurred  by  the  states 
for  the  common  defence,  was  to  bind  a  formidable  burden  upon 
a  government  which  was  then  collecting  an  independent  revenue 
for  the  first  time.^     What  chance  of  ultimate  redemption  can  there 

^  Jciferson,  in  his  letter  to  Washington,  September  9,  1792,  says  that  Hamilton 
"wishes  it  [the  debt]  never  to  be  paid,  but  always  to  be  a  thing  wherewith  to  corrupt 
and  manage  the  legislature."  Jefferson's  "  Works,"  iii.  464.  And  twenty-five  years 
later,  writing  the  introduction  to  his  "  Anas,"  he  says  in  a  famous  passage  that  Hamil- 
ton's financial  system  "  had  two  objects :  ist,  as  a  puzzle,  to  exclude  popular  understand- 
ing and  inquiry  ;   2nd,  as  a  machine  for  the  corruption  of  the  legislature."     Ibid.,  ix.  91. 

■^  As  an  example  of  the  suggestions  made  by  individuals  may  be  cited  Maclay's 
advice,  to  establish  a  revenue  sufficient  "  to  discharge  a  reasonable  interest,  proportionate 
to  the  market  price  of  the  public  debt,  until  the  whole  is  extinguished  I^y  the  western 
sales."  "  Debates  in  the  First  Senate,"  p.  259.  Maclay's  idea  of  "  a  reasonable  interest " 
appears,  from  p.  171,  to  have  been  three  per  cent. 

*  Gallatin,  in  his  "  Sketch  of  the  Finances"  (1796),  treats  the  ability  of  the  govern- 
ment to  carry  this  weight  as  something  still  to  be  proved.     The  objections  to  the  assump- 


8o  ESSAYS 

be,  to  what  else  than  a  permanent  and  probably  increasing  national 
debt  can  such  a  scheme  be  expected  to  lead  ?  was  the  anxious 
inquiry  of  men  whom  we  have  no  right  to  charge  with  mere  polit- 
ical hostility  to  Hamilton  or  with  indifference  to  the  national 
honor.  A  few  years  settled  all  such  questions.  The  changed 
relations  of  the  whole  commercial  world  brought  such  an  increase 
of  national  wealth  as  no  man  could  have  foreseen  in  1790;  and, 
by  the  irony  of  fate,  it  was  Hamilton's  opponents  who  reaped  the 
benefit. 

Hamilton's  answer  to  all  such  apprehensions  and  the  effective 
justification  of  his  policy  are  to  be  found  in  his  habitually  sanguine 
estimate  of  what  might  be  expected  from  the  growth  of  the 
country.  In  1781  he  wrote  to  Morris  that,  if  the  United  States 
should  succeed  in  the  war,  their  population  would  double  in  thirty 
years,  and  they  would  be  out  of  debt  in  twenty.^  In  his  "  Report 
on  Public  Credit,"  he  thought  that  no  country  would  be  able 
to  borrow  from  foreigners  upon  better  terms  than  the  United 
States,  "  because  none  can  perhaps  afford  so  good  security."  ^  He 
made  his  calculations,  as  we  have  seen,  on  an  early  fall  in  the 
rate  of  interest  to  be  paid  by  the  government.  And  he  wished  to 
hasten  the  rise  of  the  national  securities  which  he  foresaw,  in  order 
that,  if  they  should  pass  into  the  hands  of  foreigners,  it  might  be 
for  full  value. ^  His  optimism  was,  after  all,  the  truest  wisdom ; 
and  it  explains  and  justifies  the  boldness  with  which  he  fixed  the 
scale  of  his  funding  system.  In  his  view,  the  debt  which  was  to 
be  funded,  so  far  from  being  a  perpetual  burden,  would  fall  easily 
within  the  resources  of  the  rising  nation  ;  and,  as  it  turned  out, 
a  still  more  confident  policy  might  have  succeeded. 

The  legislation  which  he  advised  or  procured  was  strictly  con- 
sistent with  this  expectation  of  future  growth.  Threatening  as 
his  propositions  appeared  to  his  opponents,  few  men  would  now 
dispute  the  statement  that  he  undertook  to  cast  the  debt  in  such 
form  as  to  keep  its  redemption   fairly  within  the  control   of  the 

tion  of  state  debts,  he  says,  rest  chiefly  on  the  increase  of  the  general  debt  and  the 
difficulty  of  commanding  all  the  resources  of  the  country.  "  Give  the  Union  that  com- 
mand, prove  that  its  ability  of  paying  the  principal  of  the  debt  is  not  impaired  by  having 
assumed  the  state  debts,  and  the  measure  will  stand  almost  justified."  "  Writings  of 
Gallatin,"  iii.  165. 

1  "  Works  "  (Lodge's  edition),  iii.  124. 

2  "State  Papers,  Finance,"  i.  20.  ^  Thiii.,  p.  25. 


PRECEDENTS   FOLLOWED   BY   ALEXANDER    HAMILTON       8 1 

government,  making  the  securities  redeemable  either  at  pleasure 
or  at  such  a  rate  as  might  be  supposed  to  correspond  to  the  ability 
of  a  prosperous  country.  A  quarter  of  a  century  ago  the  promise 
of  a  sinking  fund  of  one  per  cent  per  annum  appeared  to  Congress 
and  to  the  public  to  be  sufficient.^  Less  than  twenty  years  ago 
a  large  part  of  the  national  debt  was  made  irredeemable  for  thirty 
years  ;  and  a  period  even  longer  was  favored  by  men  who  were 
under  no  suspicion  of  favoring  perpetual  debt.  With  a  scheme 
far  removed  then  from  perpetuity,  as  judged  by  recent  standards, 
Hamilton  undertook  also  to  provide  the  machinery  for  carrying  on 
systematic  redemption  even  before  the  resources  needed  for  the 
purpose  could  be  counted  on  with  certainty.  So  far,  then,  as  the 
terms  of  his  legislation  are  concerned,  or  those  of  the  measures 
proposed  by  him,  but  not  accepted  by  Congress,  the  charges  made 
by  his  opponents  appear  to  be  without  real  foundation. 

It  must  be  admitted,  however,  that  Hamilton,  when  urging  the 
funding  of  the  debt,  sometimes  used  language  which  might  well 
expose  him  to  the  charge  of  desiring  its  permanence  and  the  sus- 
picion of  aiming  at  its  establishment  on  something  like  the  Eng- 
lish model.  He  saw  plainly  that  the  revival  of  industry  could 
only  be  accomplished  by  the  aid  of  a  sound  mercantile  credit, 
and  that  for  the  growth  of  this  the  establishment  and  regular 
operation  of  public  credit  were  necessary.  He  saw  the  advantage 
which  must  accrue  to  the  community  when  the  resources  of  indi- 
viduals locked  up  in  claims  upon  the  government  should  become 
mobile,  by  being  converted  into  negotiable  securities  having  a 
recognized  standing  in  the  market.  And  he  held  the  opinion, 
often  expressed  since  his  time,  that  under  some  conditions  a 
diffused  domestic  debt  may  be  a  bond  of  union.  In  urging  his 
plans,  then,  he  set  forth  in  strong  terms  these  advantages  to  be 
gained  from  the  funding  system.  He  sometimes  fell  little  short  of 
declaring  a  funded  debt  to  be  a  real  increase  of  capital,  although 
he  did  in  fact  make  the  distinction  between  an  absolute  increase  of 
capital  —  which,  he  says,  a  funded  debt  is  not — and  a  tendency  to 
increase  real  wealth  by  increasing  activity.^     In  his  letter  to  Morris 

^  The  operation  of  the  sinking-fund  provision  of  1862  is  of  course  much  slackened 
by  the  construction  which  calls  for  one  per  cent.,  not  of  the  original  debt,  but  of  the 
balance  remaining  unpaid  at  the  beginning  of  the  fiscal  year. 

'^  On  this  subject,  see  his  "  Report  on  Manufactures,"  in  "  State  Papers,  Finance," 
i.  132. 

G 


82  ESSAYS 

in  1781  he  had  declared  that  a  "national  debt,  if  it  is  not  exces- 
sive, will  be  to  us  a  national  blessing.  It  will  be  a  powerful 
cement  of  the  Union."  ^  And  in  his  "  Report  on  Public  Credit  " 
he  uses  the  same  expression.^  On  this  occasion,  however,  an 
explanation  follows,  which  shows  us  his  real  thought.  "  Persuaded 
as  the  Secretary  is  that  the  proper  funding  of  the  present  debt  will 
render  il  a  national  blessing,  yet  he  is  so  far  from  acceding  to  the 
position,  in  the  latitude  in  which  it  is  sometimes  laid  down,  that 
public  debts  are  pubHc  benefits,  a  position  inviting  to  prodigality 
and  liable  to  dangerous  abuse,  that  he  ardently  wishes  to  see  it 
incorporated,  as  a  fundamental  maxim,  in  the  system  of  public 
credit  of  the  United  States,  that  the  creation  of  debt  should  always 
be  accompanied  with  the  means  of  extinguishment."  This  decla- 
ration, not  standing  alone,  but  repeated  on  other  occasions,^  places 
his  opinion  as  to  national  debts  on  consistent  and  easily  de- 
fensible grounds.  How  far  it  fell  in  with  the  English  practice 
of  the  day  can  best  be  seen  when  we  consider  the  measures  which 
Hamilton  took  to  secure  the  regular  payment  of  the  debt  the 
United  States  funded  by  the  act  of  1790. 

Coming,  then,  to  the  second  of  Hamilton's  leading  measures, 
the  establishment  of  a  sinking  fund  for  the  national  debt,  we  find 
an  expedient  unmistakably  adopted  from  English  legislation, — 
so  clearly  derived  from  that  source,  in  fact,  that  it  would  not  call 
for  discussion  here  if  the  meaning  of  the  English  precedent  had 
not  sometimes  been  lost  sight  of,  and  the  key  to  Hamilton's  action 
therefore  lost.  Without  doubt,  Hamilton  in  this  matter  followed 
Mr.  Pitt.*     What,  then,  was  the  scheme  of  Pitt .''     This  question 

1  "Works"  (Lodge's  edition),  iii.  124. 

2  "  State  Papers,  Finance,"  i.  24.  Jefferson  fastened  upon  this  famous  phrase,  and 
in  his  letter  to  Eppes,  November  6,  1813,  remarks  that  at  "the  time  we  were  funding  our 
national  debts  we  heard  much  about  'a  public  debt  being  a  public  blessing';  that  the 
stock  representing  it  was  a  creation  of  active  capital  for  the  aliment  of  commerce,  manu- 
factures, and  agriculture.  This  paradox  was  well  adapted  to  the  minds  of  believers  in 
dreams,  and  the  gulls  of  that  sort  entered  bona  fide  into  it."     Jefferson's  "  Works,"  vi.  239. 

'See  CFpecially  his  "Report  on  Public  Credit"  of  January,  1795,  "State  Papers, 
Finance,"  i.  331,  332. 

*  A  committee  consisting  of  Hamilton,  Madison,  and  Fitzsimons  reported  to  Con- 
gress a  resolution,  December  16,  1782,  declaring  that  any  excess  of  funds  granted  by  the 
states  for  the  support  of  the  debt  should  be  inviolably  appropriated  as  a  sinking  fund  for 
the  payment  of  the  principal.  Journal  of  Congress,  viii.  38.  Whether  Hamilton  was 
the  author  of  the  resolution  or  not,  it  docs  not  conflict  with  the  above  statement  of  his 
indebtedness  to  Pitt. 


PRECEDENTS   FOLLOWED   BY   ALEXANDER   HAMILTON       83 

is  not  to  be  answered  by  referring  to  the  English  sinking  fund, 
such  as  it  became  under  later  legislation  in  the  years  from  which 
most  of  the  current  impressions  about  it  date.  We  must  go  back 
to  Mr.  Pitt's  sinking  fund  act  of  1786,  that  being  the  legislation 
actually  before  Hamilton  when  he  adopted  his  policy,  and  not  yet 
modified  even  by  Pitt's  act  of  1792,  when  the  act  of  Congress  of 
that  year  gave  to  our  system  its  more  formal  organization. 

Having  a  sufficient  surplus  of  revenue  in  1786,  and,  as  was  then 
believed,  the  prospect  of  a  long  peace,  Mr.  Pitt  carried  through 
Parliament  an  act^  appropriating  ;^2  50,000  quarterly  to  be  ex- 
pended in  the  purchase  of  government  securities,  and  providing 
that  the  interest  on  securities  purchased  should  also  be  so  expended, 
all  under  the  direction  of  a  board  of  commissioners  of  high  rank, 
the  accumulation  to  continue  until  such  time  as  the  commissioners 
should  hold  securities  yielding  a  clear  income  of  four  millions, 
beyond  which  point,  distant  by  calculation  about  twenty-eight 
years,  the  interest  on  further  purchases  should  be  stopped,  and 
its  amount  made  available  for  the  relief  of  taxpayers.  This  sink- 
ing fund  of  one  million  per  annum,  it  is  to  be  observed,  was  by  the 
terms  of  the  act  applicable  to  "the  present  public  debt,"  of  which 
the  estimated  capital  was  a  little  over  ^{^238,000,000.  After  all, 
however,  Mr.  Pitt  looked  to  excess  of  income  over  expenditure  as 
the  means  of  payment ;  and  the  dazzling  results  of  compound 
interest,  often  drawn  from  Dr.  Price's  popular  calculations,^  were 
only  significant  of  the  rate  at  which  a  given  surplus  might  be 
made  to  act,  and  not  indicative  of  any  new  power  of  extinguish- 
ment. Forced  in  1792  to  meet  the  possibility  of  extraordinary 
expenditures  which  might  require  fresh  loans,  Mr.  Pitt  carried 
through  an  additional  act,^  providing  that  every  future  loan  should 

1  26  George  IIL,  c.  31, 

2  Dr.  Price's  "  Appeal  to  the  Public  on  the  Subject  of  the  National  Debt "  was 
published  in  1772,  and  had  been  followed  by  other  pamphlets  on  the  same  subject  before 
1786,  when  Mr.  Pitt  accepted  his  authority.  Dr.  Price  was  favorably  known  in  the  United 
States  ;  for  in  1778  Congress  invited  him  to  come  to  this  country  and  take  charge  of  the 
finances.  "  Diplomatic  Correspondence  of  the  Revolution,"  iii.  64.  And  as  by  the 
edition  of  his  "Observations  on  Reversionary  Payments"  in  1783  he  had  thrown  new 
light  on  the  subject  of  life  annuities,  it  is  a  little  singular  that  Hamilton  passes  him  by  in 
silence,  using  the  old  tables  of  Halley  for  his  calculations  on  annuities.  "  American 
State  Papers,  Finance,"    i.  32. 

3  32  George  III.,  c.  55.  For  a  review  of  Mr.  Pitt's  legislation  on  this  subject,  see 
Mr.  Huskisson's  speech  of  March  25,  18 13,  Mansard's  "  Parliamentary  Debates,"  xxv.  287. 


84  ESSAYS 

be  accompanied  by  fresh  taxation  sufficient  to  meet  its  interest  and 
to  provide  a  sinking  fund  of  one  per  cent  per  annum  for  its  capi- 
tal, so  that  it  might  be  extinguished  in  thirty  or  forty  years,^  accord- 
ing to  the  rate  at  which  purchases  could  be  made  for  that  purpose. 
The  act  of  1792,  however,  merely  carried  out  the  plain  intent  of 
the  act  of  1786,  that  every  funded  debt  should  have  the  means  pro- 
vided for  the  steady  extinguishment  of  its  principal.  The  machin- 
ery of  the  acts,  the  establishment  of  a  board  of  commissioners  to 
apply  the  income  of  the  fund  for  this  purpose  and  to  invest  the 
interest  earned  upon  its  accumulations,  was  a  device  for  holding 
Parliament  to  the  policy  which  it  had  undertaken ;  and  the  high 
rank  of  the  commissioners  was  relied  upon  as  a  protection  against 
legislative  tampering.  Under  all  the  legislation  down  to  1802^ 
Mr.  Pitt's  sinking-fund  system,  stripped  of  its  formalities,  was  as 
nearly  as  possible  that  which  states  and  corporations  not  infre- 
quently adopt  in  our  own  day.  It  was  not  illusory  in  its  financial 
provisions,  nor  even  in  its  dependence  on  the  chances  of  war  or 
peace.  It  did  rest,  however,  upon  a  complete  illusion  as  to  the 
possibility  of  holding  Parliament  permanently  to  the  system  —  as 
to  the  possibility,  that  is,  of  binding  the  debtor  by  a  compact  made 
with  himself.'"^ 

This  political  defect  of  Mr.  Pitt's  measure  was  not  disclosed, 
however,  during  Hamilton's  administration.  Especially  in  the 
years  1 789-1 792,  the  English  exchequer  was  working  on  a  peace 

1  Ricardo  says  "  under  the  most  unfavorable  circumstances  in  forty-five  years." 
"  Works,"  p.  524.  -^  42  George  III.,  c.  71. 

2  In  Ricardo's  hard-headed  "  Essay  on  the  Funding  System  "  he  declares  that  "  it 
will  not  .  .  .  admit  of  a  doubt  that,  if  Mr.  Pitt's  sinking  fund,  as  established  in  1792, 
had  been  always  fairly  acted  upon,  —  if,  for  every  loan,  in  addition  to  the  war  taxes,  the 
interest  and  a  one  per  cent  sinking  fund  had  been  invariably  supplied  by  annual  taxes, — 
we  should  have  made  rapid  progress  in  the  extinction  of  debt."  "  Works,"  p.  531.  But 
"  Mr.  Pitt  flattered  himself  most  strangely.  .  .  .  With  the  knowledge  of  Parliament 
which  he  had,  it  is  surprising  that  he  should  have  relied  so  firmly  on  the  resistance  which 
the  House  of  Commons  would  offer  to  any  plan  of  ministers  for  violating  the  sinking 
fund."  Ibid.,  p.  543.  In  its  actual  operation  under  later  legislation,  Ricardo  thought  the 
sinking  fund  had  increased  debt  rather  than  diminished  it,  and  so  concludes  "that  no 
securities  can  be  given  by  ministers  that  the  sinking  fund  shall  be  faithfully  devoted  to 
the  payment  of  debt,  and  without  such  securities  we  should  be  much  better  without  such 
a  fund."     Ibid.,  p.  545. 

For  Lord  Stanhope's  attempt  to  make  the  sinking  fund  a  part  of  a  fresh  contract 
with  the  fund-holders,  see  the  debate  in  tiie  House  of  Lords,  May  22,  1786.  "  Hansard," 
xxvi.  17. 


1_. 


PRECEDENTS    FOLLOWED    BY    ALEXANDER    HAMILTON       85 

footing,  and  the  sinking  fund  was  therefore  the  last  new  thing  in 
finance  and  full  of  promise,  when  Hamilton  organized  his  financial 
system,  and  adopted,  as  a  fundamental  maxim,  "  that  the  creation  of 
debt  should  always  be  accompanied  with  the  means  of  extinguish- 
ment." The  application  of  this  maxim  made  it  essential  that  with 
the  funding  of  the  debt  should  be  joined  some  plan  for  finally  sink- 
ing the  principal.  In  his  "  Report  on  Public  Credit,"  then,  Hamil- 
ton proposed  the  establishment  of  a  Board  of  Commissioners, 
composed,  like  Pitt's,  of  high  officers  of  state,^  in  whom  should  be 
vested  the  control  of  a  fund,  to  be  applied  to  the  purchase  or  pay- 
ment of  debt,  and  to  continue  so  vested  until  the  whole  of  the  debt 
should  be  discharged ;  and  he  also  proposed  the  contraction  of  a 
new  loan  by  the  commissioners,  its  proceeds  to  be  applicable  chiefly 
to  the  payment  of  matured  foreign  debt  and  to  the  purchase  of  public 
securities  below  par,  it  being,  in  his  opinion,  an  important  object 
both  to  raise  the  value  of  the  public  stock  in  the  market  and  to 
secure  for  the  government  the  profits  of  such  a  reinvestment. 
Waiving  the  proposition  for  a  new  loan  and  its  application,  it  is 
clear  that  Hamilton  had  in  mind  the  estabUshment  of  an  organized 
sinking  fund.  The  embarrassment  was  in  finding  the  means  for 
feeding  it,  in  the  untried  resources  of  the  new  government.  He 
proposed  to  devote  for  this  purpose  the  net  produce  of  the  post- 
office,  to  an  amount  not  exceeding  one  million  dollars,  to  be  used 
in  purchases,  and  so  to  serve  as  a  nucleus  for  a  growing  fund. 
Congress,  however,  besides  a  general  appropriation  of  the  pro- 
ceeds of  Western  lands  for  sinking  the  existing  debts  of  the  United 
States,^  preferred  to  use  for  this  purpose  the  surplus  of  revenue 
which  might  remain  at  the  end  of  the  year  1790,  owing  its  exist- 
ence to  the  funding  of  interest  on  the  domestic  debt  of  the  United 
States  to  that  date.^     This  appropriation  was  not  perfected  by  any 

1  Pitt's  commissioners,  under  the  act  of  1786,  were  the  Speaker  of  the  House  of 
Commons,  the  Chancellor  of  the  Exchequer,  the  Master  of  the  Rolls,  the  Accountant- 
General  of  the  Court  of  Chancery,  the  Governor  and  the  Deputy  Governor  of  the  Bank 
of  England.  Hamilton  proposed  as  commissioners  the  President  of  the  Senate,  the 
Speaker  of  the  House  of  Representatives,  the  Chief  Justice,  the  Secretary  of  the 
Treasury,  and  the  Attorney-General.  Congress,  by  the  act  of  August  12,  1790,  §  2, 
added  the  Secretary  of  State,  and  struck  out  the  Speaker  of  the  House.  "  Statutes  at 
Large,"  i.  186. 

2  Act  of  August  4,  1790,  §  22,  "  Statutes  at  Large,"  i.  144. 

^  This  surplus  is  reported,  February  i,  1793,  to  have  amounted  to  ^1,374,656. 
"State  Papers,  Finance,"  i.  219. 


86  ESSAYS 

provision  for  the  investment  of  the  interest  accruing  on  stock  pur- 
chased by  the  commissioners,  so  that  the  act  of  1790  for  the  reduc- 
tion of  the  public  debt  went  no  farther  than  the  mere  estabhshment 
of  a  commission,  not  provided  with  any  permanent  resource  what- 
ever.i  Hence  the  necessity  for  the  recommendations  made  by 
Hamilton  in  his  report  of  January  23,  1792,  when,  evidently  in  pur- 
suance of  his  original  conception,  he  advised  that  the  interest  on 
so  much  debt  as  might  at  any  time  have  been  purchased  or  paid  by 
the  commissioners  should  itself  be  appropriated  for  further  pay- 
ments or  purchases.  "  It  will  deserve  the  consideration  of  the  legis- 
lature," he  added,  "  whether  this  fund  ought  not  to  be  so  vested  as 
to  acquire  the  nature  and  quality  of  a  proprietary  trust,  incapable  of 
being  diverted  without  a  violation  of  the  principles  and  sanctions 
of  property."^  The  act  which  carried  out  this  recommendation  as  to 
the  investment  of  interest  accruing  on  previous  purchases,^  although 
it  does  not  use  the  term  "  sinking  fund,"  in  fact  created  such  a 
fund  for  the  then  existing  debt  of  the  United  States,  on  precisely 
the  model  of  Pitt's  sinking  fund  of  1786 ;  *  and  it  must  be  added  that, 
although  the  act  of  1795  and  Gallatin's  act  of  1802  differed  from 
this  model  in  form,  they  both  in  fact  depended  for  their  efficacy 
upon  the  same  essential  principle,  —  the  compounding  of  interest 
by  the  investment  of  interest  accruing  on  purchases  already  made. 
We  have  seen  that  Pitt  in  1786  relied  imprudently  on  the  good 
resolutions  of  future  Parliaments.  Hamilton,  by  the  peculiar  form 
which  had  been  given  to  a  large  part  of  the  debt  of  the  United 
States,  was  enabled  to  secure  a  much  more  solid  safeguard  for  the 
uninterrupted  working  of  his  sinking  fund.  The  six  per  cent 
debt  of  the  United  States  had  been  made  reimbursable  by  pay- 
ments not  exceeding  eight  dollars  upon  a  hundred  in  any  one  year 
for  both  principal  and  interest.  The  act  of  1792  had  contemplated 
the  redemption  of  this  stock  when  the  whole  annual  income  of  the 
sinking  fund  should  have  reached  two  per  cent  of  the  whole 
amount  of  the  stock  outstanding,  and  had  declared  the    interest 

1  See  act  of  August  12,  1790,  "Statutes  at  Large,"  i.  186. 

*  "  State  Papers,  Finance,"  i.  148. 

'  Act  of  May  8,  1792,  §§  6,  7,  "  Statutes  at  Large,"  i.  282. 

*  The  term  "sinking  fund"  does  not  appear  in  the  legislation  until  the  act  of 
March  3,  1795.  The  commissioners,  however,  in  their  journal,  appear  to  have  called 
themselves  "Commissioners  of  the  Sinking  Fund  of  the  United  States"  as  early  as 
August,  1791.     "State  Papers,  Finance,"  i.  235. 


PRECEDENTS    FOLLOWED    BY   ALEXANDER    HAMILTON       8/ 

accruing  on  stock  held  in  the  sinking  fund  to  be  "  appropriated 
and  pledged  firmly  and  inviolably  "  for  this  purpose.  But,  in  his 
elaborate  report  of  January,  1795,^  Hamilton,  dealing  with  larger 
revenues  and  brighter  prospects,  recommended  an  addition  to  the 
income  of  the  sinking  fund  of  so  much  of  the  proceeds  of  duties 
on  imports  and  tonnage  and  of  excise  as  would  suffice  to  begin  at 
once  the  redemption  of  the  six  per  cents  bearing  a  present  inter- 
est; and  so  much  of  the  same  revenues  as,  with  the  dividends 
accruing  to  the  government  from  the  United  States  Bank,  would 
complete  the  payment  for  the  bank  stock  and  enable  the  redemp- 
tion of  the  deferred  six  per  cents  to  begin  in  1802.  These  recom- 
mendations, with  others  strengthening  the  organization  of  the 
sinking  fund,  were  adopted  by  Congress.  The  appropriation  of 
the  revenues  and  resources  in  question  was  made  permanent 
"  until  the  whole  of  the  present  debt  of  the  United  States  "  should 
be  reimbursed ;  "  and  the  faith  of  the  United  States  is  hereby 
pledged  that  the  income  or  funds  aforesaid  shall  inviolably  remain, 
and  be  appropriated  and  vested  as  aforesaid,  to  be  applied  to  the 
said  reimbursement  and  redemption  in  manner  aforesaid  until  the 
same  shall  be  fully  and  completely  effected."  ^  Under  these 
provisions,  the  redemption  of  the  six  per  cent  stock  began  from 
January  i,  1795,  by  a  series  of  payments  fixed  at  eight  per  cent 
per  annum  for  principal  and  interest ;  and  the  stock  was  thus  con- 
verted from  an  ordinary  six  per  cent  of  indefinite  duration  "  into 
an  annuity  of  eight  per  cent  per  annum  for  a  period  of  somewhat 
less  than  twenty-four  years."  Hamilton,  in  proposing  this  devo- 
tion of  revenue  to  the  redemption  of  debt,  had  intended  to  make 
the  arrangement  a  contract  with  creditors,  not  to  be  violated. 
"  The  intent  is  to  secure,  by  all  the  sanctions  of  which  the  subject 
is  susceptible,  an  inviolable  application  of  the  fund,  according  to 
its  destination.  No  expedients  more  powerful  can  be  devised  for 
this  purpose  than  to  clothe  it  with  the  character  oi  private  property 
and  to  engage  absolutely  the  faith  of  the  government  by  making 
the  application  of  it  to  the  object  3.  part  of  the  contract  with  the 
creditors^  ^     Wolcott,  Hamilton's  successor,  in  his  communication 

^  "  State  Papers,  Finance,"  i.  320. 

*  Act  of  March  3,  1795,  §  9,  "  Statutes  at  Large,"  i.  435. 

^  "  State  Papers,  finance,"  i.  332.    A  little  farther  on  is  a  plain  allusion  to  the  diver- 
sion of  the  English  sinking  fund  from  its  purpose  prior  to  the  act  of  1786. 


88  ESSAYS 

to  the  House,  January  26,  1796,^  observed  that,  "as  the  injunc- 
tions of  the  law  upon  the  commissioners  of  the  sinking  fund  are 
unconditional,  and  as  permanent  funds  have  been  vested  and 
appropriated,  it  is  conceived  that  a  successive  reimbursement 
annually  of  the  debt  before  mentioned  has  become  an  irrevocable 
stipulation  with  the  creditors."  Gallatin  also  recognized  a  pledge 
of  the  public  faith  in  this  action ;  and  the  change  made  in  the 
sinking  fund  legislation  by  his  advice  in  1802^  carefully  saved  all 
rights  of  creditors  under  previous  acts,  and  he  and  his  successors 
therefore  continued,  in  war  as  well  as  in  peace,  the  reimbursement 
undertaken  in  1795.^ 

The  idea,  then,  which  Hamilton  had  in  common  with  Pitt,  and 
of  which  Pitt's  action  was  the  practical  illustration,  was  to  couple 
with  every  debt  the  means  for  its  extinguishment,*  to  be  applied 
to  that  purpose,  whatever  the  condition  of  the  Treasury  otherwise. 
This  could  not  prevent  debt  from  accumulating,  if  expenditure  was 
excessive  ;  but  it  insured  the  good  credit  of  the  loans  to  which  the 
plan  was  applied,  and  the  system,  if  adhered  to,  tended  to  keep 
constantly  before  the  legislature  the  necessity  of  having  a  stated 
revenue  above  ordinary  expenses.  The  application  of  this  idea  to 
an  existing  debt  Hamilton  was  able  to  provide  for  more  effectively 
than  Pitt,  owing  to  the  peculiar  form  given  to  the  obligations  of 
the  United  States ;  but  in  neither  case  did  it  prove  to  be  possible 
to  guarantee  sufficient  provision  for  such  fresh  expenditure  or  debt 
as  the  legislative  will  might  insist  upon.  Less  than  justice  has 
usually  been  done  to  the  common  sense  of  both  of  these  great 
statesmen.  There  is  nothing  to  show  that  either  of  them  in  adopt- 
ing his  system  had  any  delusion  as  to  the  impossibility  of  paying 
debt  without  money,  or  any  notion  that  compound  interest  could 

^  "  State  Papers,  Finance,"  i.  p.  381. 

2  Act  of  April  29,  1802,  "Statutes  at  Large,"  ii.  167.     See  especially  §§  3,  7. 

2  For  the  rate  at  which  stated  payments  of  eight  per  cent  per  annum  extinguished 
the  capital  as  well  as  defrayed  the  interest,  see  the  table  given  by  Wolcott,  "  State 
Papers,  Finance,"  i.  405  ;  compare  also  the  act  of  April  28,  1796,  §  I.  Inspection  of 
the  table  shows  the  application  of  the  compound  interest.  Obviously,  Gallatin's  system 
of  devoting  a  fixed  sum  for  interest  and  redemption  of  principal  together,  thus  increasing 
the  payment  of  principal  as  the  sum  required  for  interest  diminished,  was  an  application 
of  the  same  method  to  the  whole  debt  instead  of  to  a  particular  part  thereof. 

*  Hamilton's  "Report  on  Public  Credit"  of  1795  gives  in  a  foot-note  a  significant 
reference  to  this  provision  of  the  English  act  of  1792.  See  "State  Papers,  Finance," 
i-  33'- 


PRECEDENTS    FOLLOWED    BY    ALEXANDER    HAMILTON        89 

be  made  to  supply  the  place  of  an  adequate  revenue  or  even  to 
conceal  its  absence.  Pitt,  at  the  time  when  Hamilton  took  him  as 
his  example,  had  a  surplus ;  and  Hamilton  hoped  for  one,  and 
upon  good  grounds.  Apply  this  surplus  effectively  to  present 
debt,  and  then  contract  no  more  without  at  the  same  time  making 
provision  from  new  sources  for  its  interest  and  ultimate  payment, 
—  this  was  the  system  on  which  both  proceeded.  In  the  one  case 
the  system  was  swamped  by  the  gigantic  wars  of  the  French 
Revolution ;  in  the  other  it  was  made  useless  by  the  astonishing 
growth  of  national  revenue ;  but  in  neither  case,  under  the  con- 
ditions and  for  the  purposes  of  the  time,  was  it  the  pure  folly 
which  it  is  often  represented  to  have  been. 

The  third  point  in  Hamilton's  financial  system  which  we  have 
to  consider  here  is  the  establishment  of  a  Bank  of  the  United 
States.  This  measure  was  referred  to  by  Hamilton  in  his  "  Report 
on  Public  Credit "  as  a  part  of  his  scheme  not  then  fully  matured, 
and  was  presented  in  form  in  December,  1790,  under  a  resolution 
of  the  House  adopted  in  the  previous  August,  calling  upon  the 
Secretary  to  report  "  such  further  provisions  as  may,  in  his  opinion, 
be  necessary  for  establishing  the  public  credit."  In  stating  the 
advantages  to  be  gained  from  a  bank  he  dwelt  especially  on  the 
influence  of  a  bank  in  quickening  and  virtually  increasing  the  pro- 
ductive capital  of  the  country  and  its  utility  as  a  financial  agency 
of  the  government.  It  was  then  not  far  from  eleven  years  since 
the  probable  date  of  his  draft  of  a  letter  to  Morris  ^  urging  the 
establishment  of  a  Bank  of  the  United  States  by  the  Confederation, 
and  not  far  from  ten  years  since  his  letters  to  Duane,  Sears,  and 
again  to  Morris,  discussing  and  enforcing  a  similar  proposition. 
The  claim  of  priority  in  the  conception  of  a  national  bank,  which 
has  been  rested  on  these  letters,  is  hardly  a  valuable  one.  The 
letters  were  written  at  the  moment  when  the  continental  paper  had 

1  The  draft  of  a  letter  to  Morris,  Hamilton's  "Works"  (Lodge's  edition),  iii.  61,  is 
inserted  in  the  earlier  edition  of  the  "  Works,"  i.  116,  as  if  written  between  December, 
1779,  and  March  17,  1780.  A  few  important  blanks  are  left  in  it  to  be  filled  later,  and 
the  manuscript  is  said  to  be  otherwise  defective.  It  seems  not  to  have  been  referred  to 
in  subsequent  correspondence  between  Hamilton  and  Morris,  and  may  then  perhaps  be 
the  draft  of  an  intended  letter,  never  sent,  but  interesting  as  showing  the  state  of  Hamil- 
ton's opinions  on  the  subject  when  he  was  twenty-three  years  old.  If  sent,  the  letter 
was  intended  to  be  anonymous,  as  appears  from  its  last  paragraph. 


90  ESSAYS 

become  practically  worthless,  and  Congress  was  at  its  wits'  end. 
The  schemes  proposed  by  Hamilton  were  perhaps  no  wilder  than 
were  offered  by  others,  but  he  would  have  been  slow  in  1790  to 
recognize  their  affinity  with  the  maturely  deliberated  proposition 
of  that  year.  It  is  enough  to  say  that  the  second  and  more  care- 
fully elaborated  of  the  letters  to  Morris^  proposes  a  bank,  the 
stock  of  which,  to  the  extent  of  at  least  one-third,  might  be  paid 
for  in  landed  security,  the  notes  of  20s.  and  upward  to  bear  inter- 
est, and  the  places  of  redemption  to  be  in  the  interior,  making 
"applications  for  payment  of  bank-notes  less  convenient."^ 
Among  the  advantages  of  the  scheme,  besides  the  loans  to  be 
made  to  Congress,  was  the  familiar  attraction  of  all  land-bank 
schemes,  that  proprietors  could  have  the  use  of  their  land  and  also 
the  use  of  a  cash  representative  of  its  value.^ 

The  earlier  schemes,  however,  mark  the  length  of  time  for 
which  Hamilton's  mind  had  been  busied  with  the  idea  of  securing 
financial  reUef  from  a  great  banking  institution  of  some  sort ;  *  and 
his  letters  show  his  interest  in  the  working  of  the  great  European 
banks.  Of  these  there  was  but  one  which  could  be  an  available 
model.  The  French  Caisse  d'Escompte  was  embarrassed  by  its 
close  connection  with  the  government,  hardly  tried  to  conceal  the 
real  inconvertibility  of  its  paper,  and  was  fast  approaching  ruin. 
The  Bank  of  Amsterdam,  still  in  good  credit,  was  organized  upon 
a  plan  adapted  only  for  an  opulent  community,  rich  in  specie,  and 
indifferent  to  the  use  of  bank  credit  in  its  usual  forms.  There 
remained  the  Bank  of  England,  a  successful  institution,  strengthen- 
ing private  enterprise,  aiding  the  government,^  and  regulating  cur- 
rency upon  a  sound  basis.     Without  presenting  this  formally  as 

1  April  30,  1781,  Hamilton's  "Works"  (Lorlge's  edition),  iii.  82. 

2  Ibid.,  p.  118.  3  ii)ij^^  p,  107. 

*  The  constitution  of  the  Bank  of  New  York,  adopted  March  15,  1784,  given  by 
Domett,  "  History  of  the  Bank  of  New  York,"  p.  11,  was  written  by  Hamilton,  but  con- 
tains little  except  the  formal  provisions  necessary  for  determining  the  duties  and  respon- 
sibilities of  officers,  rights  of  stockholders,  and  other  details  incident  to  the  organization 
of  a  moneyed  institution.  The  act  of  incorporation  {Ibid.,  p.  122),  passed  March  21, 
1791,  contains,  however,  a  series  of  provisions  relating  to  the  banking  powers  of  the 
corporation,  which  f(jllow  closely  even  the  phraseology  of  the  act  passed  by  Congress  a 
month  before,  estaJjlishing  the  Bank  of  the  United  States. 

^  In  1781,  Hamilton,  writing  to  Morris,  and  referring  to  the  Bank  of  England,  says, 
"  'Tis  by  this  alone  she  [England]  now  menaces  our  independence."  "  Works  "  (Lodge's 
edition),  iii.  loi. 


PRECEDENTS   FOLLOWED    BY   ALEXANDER   HAMILTON       91 

an  example,^  he  shaped  his  own  proposition  according  to  the  lines 
of  the  Bank  of  England,  with  the  changes  which  the  circumstances 
of  the  United  States  required. 

The  primary  question  as  to  the  connection  of  the  government 
with  the  proposed  bank  is  argued  and  settled  by  Hamilton  in  his 
report  in  accordance  with  the  English  precedent  and  directly 
against  the  other  European  cases.  He  concludes  in  favor  of  an 
institution  in  private  hands  and  under  private  direction,  and  to  be 
influenced  as  little  as  possible  by  public  necessity.  "The  keen, 
steady,  and,  as  it  were,  magnetic  sense  of  their  own  interest  as 
proprietors,  in  the  direction  of  a  bank,  pointing  invariably  to  its 
true  pole,  the  prosperity  of  the  institution,  is  the  only  security 
that  can  always  be  relied  upon  for  a  careful  and  prudent  adminis- 
tration." No  profit  to  be  gained  by  the  state  from  banking  could 
in  his  mind  be  set  against  this  advantage.  The  state  might  be  an 
owner  of  stock,  though  not  of  a  principal  part  of  it,  and  ought  to 
exercise  a  supervision  for  the  good  of  the  community ;  but  he 
admitted  no  real  departure  from  the  theory  of  the  Bank  of  Eng- 
land as  an  essentially  private  establishment  employed  as  a  public 
agent.  This  independence  of  the  executive  he  secured  by  forbid- 
ding loans  of  serious  amount  for  the  use  of  the  government,  unless 
specially  authorized  by  law,  as  was  done  by  the  Bank  of  England 
charter  until  the  passage  of  Mr.  Pitt's  act  in  1793.^  As  for  the 
holding  of  public  securities  as  an  investment  of  the  capital  of  the 
bank,  Hamilton  was  establishing  his  bank  in  the  presence  of  a  debt 
already  contracted,  instead  of  using  it  as  a  means  of  borrowing,  as 
the  Bank  of  England  had  been  used.  It  was  enough  for  his  pur- 
pose, then,  to  allow  three-fourths  of  the  stock  to  be  paid  for  by 
transfer  of  public  securities,  these  to  be  held  until  the  needs  of  the 
bank  might  require  their  sale. 

It  has  been  remarked  already  that  for  Hamilton's  purposes  a 
bank  was  needed  of  a  different  kind  from  the  Bank  of  Amsterdam. 
A  bank  of  discount,  deposit,  and  issue  was  required  for  the  trans- 
action of  general  business,  public  and  private.     In  the  summary 

^  The  Bank  of  England  is  not  mentioned  in  the  "  Report  on  a  National  Bank,"  ex- 
cept in  a  passage  near  the  beginning,  where  Hamilton  says  that  public  banks  have  suc- 
cessively obtained  in  Italy,  Germany,  Holland,  England,  and  France,  as  well  as  in  the 
United  States.     The  omission  appears  to  be  studied. 

^  23  George  III.,  c.  32.     See  McLeod,  "Theory  and  Practice  of  Banking,"  i.  445. 


92 


ESSAYS 


of  his  plan  given  in  his  report,  Hamilton  makes  a  brief  statement 
as  to  the  powers  of  the  proposed  bank  as  follows :  — 

VII.  The  company  may  sell  or  demise  its  lands  and  tenements,  or  may  sell 
the  whole  or  any  part  of  the  public  debt,  whereof  its  stock  shall  consist,  but  shall 
trade  in  nothing  except  bills  of  exchange,  gold  and  silver  bullion,  or  in  the  sale 
of  goods  pledged  for  money  lent,  nor  shall  take  more  than  at  the  rate  of  six  per 
centum  per  annum  upon  its  loans  or  discounts. 

The  bill  offered  in  the  Senate  was  drawn  by  Hamilton  and, 
with  few  changes,  became  a  law,  and  we  there  find  this  important 
provision  amplified  in  terms  which  may  fairly  be  set  side  by  side 
with  a  similar  provision  in  the  Bank  of  England  Act  of  1694. 

{Act  of  Febrtcary  25,  1791.]  {_Act  of  ^  Will,  and  Mary,  c.  20.] 

The  said  corporation  may  sell  any  §  xxvii.   [That  the  corporation  shall 

part  of  the  public  debt  whereof  its  stock  not  deal  in  Goods,  Wares,  or  Merchan- 

shall  be  composed,  but  shall  not  be  at  dise.]     §  xxviii.  Provided,  That  noth- 

liberty   to   purchase    any   public    debt  ing  herein  contained  shall  in  any  ways 

whatsoever  ;    nor  shall  directly  or  in-  be  construed  to  hinder  the  said  Corpora- 

directly  deal  or  trade  in  anything,  ex-  tion  from  dealing  in  Bills  of  Exchange, 

cept  bills  of  exchange,  gold  or  silver  or  in  buying  or  selling  Bullion,  Gold  or 

bullion,  or  in  the  sale  of  goods  really  Silver,  or  in  selling  any  Goods,  Wares, 

and  truly  pledged  for  money  lent  and  or  Merchandise  whatsoever,  which  shall 

not  redeemed  in  due  time ;  or  of  goods  really  and  bona  fide  be  left  or  deposited 

which  shall  be  the  produce  of  its  lands.  with  the  said  Corporation  for  Money 

Neither  shall  the  said  corporation  take  lent  and  advanced  thereon,  and  which 

more  than  at  the  rate  of  six  per  centum  shall   not   be   redeemed   at   the    Time 

per  annum,  for  or  upon  its  loans  or  dis-  agreed  on,  or  within  three  Months  after, 

counts.  or  from  selling  such  Goods  as  shall  or 

may  be  the  Produce  of  Lands  purchased 
by  the  said  Corporation. 

Other  passages  also  might  be  cited  to  show  that  the  framer  of 
the  act  incorporating  the  Bank  of  the  United  States  had  the  Eng- 
lish acts  open  before  him  ;  but,  after  all,  the  important  fact  is  that 
in  both  there  was  the  same  purpose  of  establishing  a  private  com- 
pany with  general  banking  powers,  to  cooperate  with  the  Treas- 
ury. The  limits  and  safeguards  thrown  around  the  use  of  these 
powers  were  few  in  both  cases,  with  differences  mainly  to  be 
accounted  for  by  differing  conditions.  In  each,  the  redemption  of 
notes  in  specie  was  required  ;  and  the  amount  of  the  issue  was 
limited  in  the  charter  of  the  Bank  of  England  by  forbidding  debts 
in  excess  of  the  capital,  and  in  the  charter  of  the  Bank  of  the 


PRECEDENTS    FOLLOWED    BY    ALEXANDER    HAMILTON       93 

United  States  by  forbidding  the  debts  exclusive  of  deposits  to 
exceed  the  capital.  The  prohibition  of  investment  in  real  estate 
was  inserted  by  Hamilton,^  and  with  good  reason,  considering  the 
condition  of  the  United  States  at  that  date. 

Closing  here  the  present  examination  of  Hamilton's  system,  it 
must  be  added,  in  order  to  avoid  misconception,  that  it  is  in  the 
grouping  of  these  measures  so  as  to  make  a  consistent  scheme  for 
the  accomplishment  of  a  definite  purpose  that  we  find  Hamilton's 
best  title  to  rank  as  a  great  financial  statesman.  He  had  the 
insight  and  cheerful  resolution  which  enabled  him  to  see  and  draw 
out  the  still  latent  strength  of  the  new  country,  the  knowledge  of 
the  world  necessary  for  bringing  together  the  best  of  tried  expedi- 
ents, and  the  breadth  of  conception  required  for  shaping  a  system 
which  should  make  growth  rapid  and  burdens  lighter,  by  the 
creation  of  public  and  private  credit.  No  statesman  could  have  a 
greater  task  set  for  him,  and  political  science  can  hardly  have  in 
store  any  greater  triumph  than  this  apphcation  of  the  experience 
of  other  men  and  other  nations.  Details  may  be  criticised,  and 
yet  as  a  whole  his  measures  meet  the  real  test  of  financial  sound- 
ness, representing  in  their  great  features  the  best  that  could  be 
done  under  the  conditions  then  existing.  And  in  this  as  in  other 
parts  of  our  political  system  his  impress  was  lasting.  "  The  results, 
legislative  and  administrative,"  says  the  biographer  of  his  greatest 
successor,  "  were  stupendous  and  can  never  be  repeated.  A  gov- 
ernment is  organized  once  for  all,  and  until  that  of  the  United 
States  fairly  goes  to  pieces  no  man  can  do  more  than  alter  or 
improve  the  work  accomplished  by  Hamilton  and  his  party." 

^  Hamilton's  letter  to  Church,  March  10,  1784,  condemns  Chancellor  Livingston's 
scheme  of  a  land  bank,  and  shows  that  Hamilton  had  then  outgrown  the  ideas  expressed 
in  his  letter  to  Morris  in  1781.  See  Hamilton's  "Works"  (J.  C.  Hamilton's  edition), 
i.  414. 


THE   DIRECT   TAX   OF    1861I 

The  direct  tax  laid  by  the  act  of  Congress  of  August  5,  1861, 
was  the  fifth  levy  which  has  been  made  under  the  provisions  of 
the  Constitution,  requiring  that  "  representation  and  direct  taxes 
shall  be  apportioned  among  the  several  states  .  .  .  according  to 
their  respective  numbers."  There  would  be  little  risk  in  predict- 
ing that  this  will  also  be  the  last  resort  to  a  method  of  taxation 
which  the  framers  of  the  Constitution  thought  important  enough 
to  hold  a  place  in  one  of  the  difificult  compromises  embodied  in  that 
instrument.  The  insufficiency  of  the  method  for  revenue  purposes, 
the  confusion  which  has  arisen  as  to  the  meaning  and  incidence 
of  a  direct  tax  under  the  Constitution,  the  extraordinary  inequali- 
ties which  grew  out  of  the  circumstances  under  which  the  last  levy 
was  made,  and  the  really  insoluble  questions  raised  as  to  the  effect 
which  refunding  the  tax  would  have  in  mitigating  or  aggravating 
those  inequalities,  make  it  altogether  probable  that,  in  any  future 
stress  of  fortune,  relief  for  the  Treasury  will  be  sought  anywhere 
else  rather  than  in  a  resort  to  this  discredited  source. 

The  phrase  "  direct  taxation  "  appears  to  have  been  introduced 
in  the  Convention  of  1787  by  Gouverneur  Morris,  on  July  12,^ 
when  he  made  the  motion,  which  was  carried,  "  that  direct  taxation 
ought  to  be  proportioned  to  representation."  The  Convention,  per- 
haps, had  no  clear  opinion  as  to  the  precise  meaning  of  the  words 
here  used;^  but  it  is  plain  that  Morris  had  in  mind  some  well- 
marked  distinction  between  direct  and  indirect  taxes.  He  had 
proposed  at  first  simply  that  "  taxation  shall  be  in  proportion  to 

^  Quarterly  Journal  of  Economics,  1v\-^^  1889. 

2  The  use  of  the  same  expression  in  what  purports  to  be  the  draft  of  a  Constitution 
offered  by  Mr.  Pinckney,  May  29,  need  not  be  considered,  in  view  of  the  plainly  garbled 
text  of  that  document.     Elliot,  "Debates,"  v.  130,  578. 

3  Thus,  on  August  20,  when  the  report  of  the  Committee  of  Detail  was  under  dis- 
cussion, "  Mr.  Kinf;  asked  what  was  the  precise  meaning  of  direct  taxation.  No  one 
answered."     "  Madison's  Debates,"  in  Elliot,  v.  451. 

94 


THE    DIRECT   TAX    OF    1861  95 

representation."  To  this  it  was  objected  that,  although  just,  this 
plan  might  be  embarrassing  and  "  might  drive  the  legislature  to 
the  plan  of  requisitions  "  ;  and  Morris  thereupon,  admitting  that 
objections  were  possible,  "  supposed  they  would  be  removed  by 
restraining  the  rule  to  direct  taxation.  With  regard  to  indirect 
taxes  on  exports  and  imports  and  on  consumption,  the  rule  would 
be  inapplicable."  Wilson  also  saw  no  way  of  carrying  Morris's 
plan  into  execution,  "  unless  restrained  to  direct  taxation  " ;  and 
Morris  then  modified  his  motion,  with  the  result  that  the  phrase 
"  direct  taxes  "  passed  into  the  Constitution.^  It  is  clear  that  in 
Morris's  understanding,  and  in  Wilson's  as  well,  none  but  direct 
taxes  could  be  levied  by  an  apportionment  among  the  states,  the 
others  named  requiring  to  be  laid  by  a  general  rate. 

From  what  source,  then,  did  Morris  and  Wilson  derive  this 
classification,  which  set  down  as  direct  certain  taxes  having  this 
convenient  characteristic  of  being  readily  apportioned  among  the 
states .''  The  answer  to  this  question  is,  no  doubt,  to  be  found  in 
Hamilton's  suggestion  that  the  writings  of  the  French  economists 
of  the  eighteenth  century  were  the  source.^  The  doctrine  that 
agriculture  is  the  only  productive  employment,  and  that  the  net 
product  from  land,  to  be  found  in  the  hands  of  the  landowner,  is 
the  only  fund  from  which  taxation  can  draw  without  impoverishing 
society,  led  them  habitually  to  class  taxes  as  direct,  when  laid  im- 
mediately upon  the  landowner,  and  as  indirect,  when  laid  upon 
somebody  else,  but  in  their  opinion  destined  to  be  borne  ultimately 
by  the  landowner.  This  distinction  between  direct  and  indirect 
taxation,  resting  upon  the  supposed  method  of  incidence  upon 
a  single  class  of  persons,  is  fully  developed  and  used  by  Quesnay, 
Mercier  de  la  Riviere,  Dupont  de  Nemours,  and  Turgot.  It  was 
a  necessary  result  of  their  reasoning,  became  familiar  in  all  the 
discussions  of  the  school  in  France,  and,  we  can  hardly  doubt,  was 
carried  to  the  knowledge  of  readers  in  political  science  in  other 
countries,  during  the  short-lived  preeminence  of  the  Physiocrats.^ 

^  Elliot,  V.  302. 

2  See  his  brief  as  counsel  for  the  United  States  in  the  Carriage  Tax  case,  Hylton  v. 
United  States,  Hamilton's  "  W^orks,"  vii.  845. 

^  Adam  Smith  did  not  adopt  their  use  of  direct  and  indirect,  because  he  rejected 
the  reasoning  on  which  it  rested  ;  and  he  does  not  appear  to  have  formally  classified 
taxes  under  these  heads  upon  any  other  principle,  although  he  occasionally  uses  the 
terms  "  direct,"  "  directly,"  and  their  opposites,  with  a  near  approach  to  their  modern  use. 


96  ESSAYS 

As  for  the  kind  of  taxes  to  be  classed  as  direct,  there  was  not 
complete  agreement.  Necessarily,  taxes  upon  land  or  its  returns 
were  set  down  as  direct  taxes,  and  so,  too,  taxes  upon  commodities, 
or  consumption,  were  called  indirect.  Taxes  upon  persons,  how- 
ever, do  not  appear  to  be  regarded  by  Quesnay,  Dupont  de  Ne- 
mours, or  Mercier  de  la  Riviere  as  direct.  The  writer  last  named, 
after  saying  that  the  fund  for  taxation  is  in  the  hands  of  the  land- 
owner, and  that  to  draw  from  it  otherwise  than  directly  is  a  sub- 
version of  the  natural  order  of  society,  lays  down  the  principle  that 
"  la  forme  de  I'impot  est  indirecte  lorsqu'il  est  etabli  ou  sur  les 
personnes-memes  ou  sur  les  choses  commerciables."  ^  In  Turgot's 
writings,  however,  we  find  taxes  upon  persons  occasionally  classed 
as  direct.  Thus,  in  his  "  Plan  d'un  Memoire  sur  les  Imposi- 
tions,"^ he  says  of  the  forms  of  taxation  :  — 

II  n'y  en  a  que  trois  possibles  :  — 

La  directe  sur  les  fonds. 

La  directe  sur  les  personnes,  qui  devient  un  imp6t  sur  I'exploitation. 

L'iniposition  indirecte,  ou  sur  les  consommations. 

And  in  the  fragment  which  we  have  of  his  "  Comparaison  de 
ITmpot  sur  le  Revenu  des  Proprietaires  et  de  ITmpot  sur  les  Con- 
sommations," ^  a  memoir  prepared  for  the  use  of  Franklin,  a  careful 
analysis  of  the  same  purport  is  made,  although  the  point  of  formal 
classification  is  not  reached.  Of  all  writers  upon  economics  in 
1787,*  Turgot  was  perhaps  the  one  most  likely  to  have  the  ear  of 
American  readers ;  and,  of  Americans,  Gouverneur  Morris  and 
James  Wilson  were  as  likely  as  any  to  give  him  their  attention. 
The  former  had  already  formed  that  familiar  acquaintance  with 
French  literature  and  politics  which  made  possible  his  singular 
career  in  Paris  a  few  years  later,  and  Wilson  had  been  from  1779 
to  1783  accredited  as  advocate-general  of  the  French  nation  in  the 
United  States.     There  was,  then,  an  easy  and  a  probable  French 

1  "  L'Ordre  Naturel  des  Societc-s  Politiques,"  in  Daire's  "  Physiocrates,"  p.  474.  For 
Quesnay's  use  of  the  terms  in  question,  see  Daire,  i.  83,  127;  and  for  Dupont  de 
Nemours',  ibid.,  ii.  354-358. 

2  Daire,  i.  394 ;   and  see  also  396. 
'  Daire,  i.  409. 

*  Dupont  de  Nemours  published  his  "  Memoires  sur  la  Vie  ct  les  Ouvrages  de  M, 
Turgot"  (i6mo,  2  parts,  pp.  156  and  216)  in  Philadelphia  and  Paris,  in  1782,  the  year 
after  Turgot's  death.     See  Ilildeburn,  "  Issues  of  the  Press  in  Pennsylvania." 


THE    DIRECT   TAX    OF    1861 


97 


source  for  the  meaning  which  they  both  attached  to  the  phrase 
introduced  by  Morris. 

It  is  to  be  observed,  also,  that  there  were  some  well-known 
precedents  for  levying  by  apportionment  such  taxes  as  those  which 
Morris  and  Wilson  probably  had  in  mind.  The  French  taille  reellCy 
a  tax  on  the  income  of  real  property,  was  laid  by  apportioning  a 
fixed  sum  among  the  provinces  and  requiring  from  each  its  quota, 
as  has  been  the  practice  in  levying  its  substitute,  the  impot  fonder, 
ever  since  1790.  The  capitation  was  also  levied  in  France,  before 
the  Revolution,  in  the  same  manner.  The  English  land  tax,  estab- 
lished under  William  III.,  had  for  ninety  years  presented  an  ex- 
ample of  apportionment  among  counties  and  other  subdivisions, 
leaving  the  rate  for  each  locality  to  be  settled  at  the  point  neces- 
sary to  give  the  due  quota.  Other  contemporary  examples  could 
easily  be  cited ;  but  these  are  enough  for  the  present  purpose, 
being  necessarily  familiar  in  this  country  in  1787,  and  likely  to 
have  a  strong  influence.^ 

The  meaning  of  the  phrase  "  direct  taxation,"  as  to  which  Rufus 
King  vainly  sought  for  light,  was  judicially  considered  in  the  well- 
known  Carriage  Tax  case,  Hylton  v.  United  States,  in  1796.  The 
case  had  been  heard  in  the  circuit  court  by  Wilson,  who  was  then 
one  of  the  associate  justices  of  the  Supreme  Court;  and,  when  his 
judgment  in  the  lower  court  was  affirmed  by  the  full  bench,  he 
contented  himself  with  a  bare  statement  of  assent,  so  that  we  lose 
what  would  have  been  the  most  interesting  and  perhaps  the  most 
important  opinion  of  all.  The  judgment  of  the  court,  declaring 
that  a  tax  upon  carriages  is  not  a  direct  tax  within  the  meaning  of 
the  Constitution,  was  supported  by  considerations  which  showed 
a  strong  disposition  to  limit  the  definition  of  direct  taxes  so  as 
to  include  only  capitation  and  land  taxes.  Mr.  Justice  Paterson, 
indeed,  suggested  personal  property  by  general  valuation  as  a 
possible  additional  subject  of  direct  taxation,  the  practicability  of 
apportionment  having  already  been  accepted  as  a  test  of  the  proper 
meaning  of  the  term  ;  but  he  thought  the  question  difficult,  and 

^  For  the  taille  and  capitation,  see  Pizard,  "La  France  en  17S9,"  p.  257  ;  De  Parieu, 
"Traite  de  I'lmpot,"  i.  224,  153.  The  act  of  1763,  apportioning  the  English  land  tax,  is 
given  in  full  in  Ruffhead's  "  Statutes  at  Large,"  ix.  78.  The  text  of  the  acts  of  William 
in. is  found  in  the  Rolls  edition  of  the  statutes.  See  also  Dowell,  "  History  of  Taxation 
and  Taxes  in  England,"  iii.  94-97. 
11 


98  ESSAYS 

added  that  he  never  entertained  a  doubt  that  the  principal  —  he 
would  not  say  the  only  —  objects  contemplated  by  the  framers  of 
the  Constitution  were  a  capitation  tax  and  a  tax  on  land.  Wolcott 
in  his  report  upon  "Direct  Taxes,"  in  December,^  179^,  took  no 
notice  of  the  decision  by  the  Supreme  Court  a  few  months  before, 
but,  fci  reasons  of  expediency,  concluded  that  the  objects  of  direct 
taxation  should  be  limited  to  lands,  houses,  and  slaves ;  and  they 
accordingly  were  thus  limited  by  Congress  in  the  acts  of  1798, 
under  which  the  first  direct  tax  was  levied.  When  the  question 
came  before  the  Supreme  Court  again  in  the  case  of  Veazie  Bank 
v.  Fenno^  Chief  Justice  Chase  referred,  with  some  doubt,  to  Pater- 
son's  suggestion  as  to  a  tax  on  personal  property  by  general  valua- 
tion, but  remarked  that,  in  the  practical  construction  of  the  Consti- 
tution by  Congress,  direct  taxes  had  been  limited  to  land  and 
capitation  taxes,  and  that  this  construction  was  entitled  to  great 
consideration  in  the  absence  of  anything  adverse  to  it  in  the  dis- 
cussions of  the  federal  convention  or  of  the  state  conventions 
which  ratified  the  Constitution.  Finally,  when  the  whole  subject 
was  reviewed  in  the  case  of  Springer  v .  United  States^  Mr.  Justice 
Swayne,  giving  the  opinion  of  the  court,  declared  it  to  be  their 
conclusion  "  that  direct  taxes,  within  the  meaning  of  the  Constitu- 
tion, are  only  capitation  taxes,  as  expressed  in  that  instrument,  and 
taxes  on  real  estate."  The  judicial  interpretation  of  the  phrase, 
"  direct  taxes,"  is  well  settled  therefore,^  and  in  close  accordance 
with  the  usage  found  in  the  writings  of  the  French  economists  of 
the  last  century. 

The  acts  of  1798^  established  the  general  plan  on  which  all 
succeeding  direct  taxes  have  been  levied.  These  acts  apportioned 
the  total  sum  of  two  millions  of  dollars  among  the  states,  divided 
them  all  into  convenient  divisions,  placed  every  division  under  a 
commissioner,  and  provided  the  requisite  array  of  principal  and 

1  "State  Papers  on  Finance,"  i.  414.  ^  8  Wallace,  533. 

'  102  United  States,  586.  This  was  a  case  arising  under  the  act  of  1864  laying  an 
income  tax,  the  plaintiff  in  error  maintaining  that  this,  as  a  direct  tax,  should  have  been 
apportioned  among  the  states,  under  the  provisions  of  the  Constitution. 

*  The  unexpected  extension  of  the  meaning  of  "  direct  taxes  "  by  the  Supreme  Court 
in  the  "income  tax"  decisions  of  1895  '^  touched  upon,  p.  133,  below. 

*  The  act  of  July  9,  1798,  I  "Statutes  at  Large,"  p.  580,  provided  for  valuation  of 
taxable  objects ;  and  that  of  July  14,  ibid.,  p.  597,  provided  for  the  apportionment  and 
collection. 


THE   DIRECT   TAX   OF    1861  99 

assistant  assessors,  collectors,  supervisors,  and  inspectors.  The 
quota  of  every  state  was  to  be  assessed  upon  houses,  lands,  dwell- 
ing-houses, and  slaves.  Houses  were  to  be  assessed  according  to  a 
classified  valuation  at  rates  fixed  for  the  whole  Union,  and  slaves 
were  to  be  assessed  fifty  cents  per  head,  if  between  twelve  and 
fifty  years  of  age ;  and  so  much  of  the  quota  of  any  state  as  was 
not  covered  by  the  levy  upon  houses  and  slaves  was  to  be  assessed 
upon  lands  and  improvements  at  such  rates  as  might  be  required 
to  make  up  the  deficiency.^  The  tax  was  to  be  a  lien  upon  the 
real  estate  and  slaves  of  the  person  assessed  for  two  years  from 
the  date  when  it  became  payable,  and  collection  could  be  enforced 
by  distraint  and  sale  of  personal  effects.  Wolcott  had  suggested, 
but  had  also  disapproved,  a  plan  for  fixing  a  time  at  which  a  state 
might  pay  its  quota  into  the  Treasury  and  for  prescribing  collec- 
tion by  the  authority  of  the  United  States  "  in  cases  of  delin- 
quency." 2  But  no  trace  of  any  such  plan  is  to  be  found  in  the 
acts  of  1798.  Beyond  the  bare  apportionment  the  states  are  not 
recognized  except  as  mere  geographical  divisions.  The  acts  pro- 
vide solely  for  levy  by  the  federal  government  upon  its  citizens, 
the  individual  taxpayer  is  the  only  party  responsible,  and  no 
authority  stands  or  can  interpose  between  him  and  his  government. 
The  framers  of  the  direct  tax  acts  of  1813^  followed  in  general 
the  lines  laid  down  in  1798.  Comparison  of  the  acts  will  show 
revision  and  rearrangement,  and  perhaps  simplification  of  the  sys- 
tem, but  no  serious  change  of  theory.  The  tax  of  three  millions  is 
apportioned  to  the  counties  in  every  state,  and  it  is  provided  that 
the  state  legislature  may  by  act  vary  the  county  quotas,  provided 
such  alterations  are  duly  certified  to  the  Secretary  of  the  Treasury ; 

^  This  residual  assessment  upon  lands  closely  resembles  the  method  adopted  in  as- 
sessing the  group  of  taxes  of  which  the  English  land  tax  is  the  survival.  See  10  William 
III.,  c.  9  (Rolls  ed.);   and  Act  of  1763,  4  George  III.,  c.  2,  §§  3,  4  (Ruff head). 

2  This  plan,  he  says,  "  partakes  of  the  system  of  requisitions  upon  the  states,  which 
utterly  failed  under  the  late  confederation,  and  to  remedy  which  was  one  great  object 
of  establishing  the  present  government."     "  State  Papers  on  Finance,"  i.  436. 

^  The  act  of  July  22,  181 3, 3  "  Statutes  at  Large,"  p.  22,  provides  for  the  assessment 
and  collection,  and  that  of  August  2,  ibid.,  p.  53,  for  the  apportionment.  Gallatin  sailed 
for  Europe  in  May,  181 3,  but  it  seems  probable  that  the  direct  tax  bills  of  that  year  were 
among  the  bills  spoken  of  in  his  letter  of  June  10,  1812,  as  already  prepared  in  answer 
to  a  request  from  the  Committee  of  Ways  and  Means.  "  State  Papers  on  Finance,"  ii. 
614.  It  is  interesting  to  observe  that,  in  January,  1812,  Gallatin  appears  to  have  lost  his 
hold  on  the  strict  definition  of  direct  taxes  under  the  Constitution.     Ibid.,  p.  525. 


lOO  ESSAYS 

but  the  levy  according  to  such  alterations  is  made  by  virtue  of  the 
act  of  Congress,  and  not  under  the  act  of  the  state  legislature.^ 
The  tax  is  to  be  levied  on  the  value  of  lands,  houses,  and  slaves, 
"  at  the  rate  each  of  them  is  worth  in  money,"  abandoning  the 
peculiar  method  of  a  residual  assessment  upon  land,  adopted  in 
1798  ;  and  the  provisions  as  to  enforcement  by  lien  and  distress 
remain  as  before.  In  short,  the  theory  of  the  acts  of  18 13  con- 
tinues to  be  that  of  a  levy  by  the  general  government  upon  the 
individual  citizen,  in  no  way  different  in  principle  from  any  case  of 
national  internal  taxation.  With  a  wise  regard  to  convenience, 
however,  the  apportioning  act  provided  that  any  state  "  may  pay 
its  quota  into  the  Treasury  of  the  United  States,"  and  thus  secure 
a  deduction  of  fifteen  per  cent,  by  paying  before  February  10,  1814, 
or  of  ten  per  cent,  by  paying  before  May  i  ;  "  and  no  further  pro- 
ceedings shall  thereafter  be  had  under  this  act  in  such  state." 
The  option  thus  allowed  to  the  states  did  not,  however,  change  the 
character  of  the  tax  as  a  tax  upon  individuals,  or  make  it  a  tax  upon 
states.  Seven  states  assumed  the  payment  of  their  quotas ;  ^  but 
the  other  eleven,  in  which  the  collection  by  federal  officers  was 
made  as  originally  provided,  were  not  for  that  reason  in  any  sense 
delinquent  as  states,  nor  did  they  thereby  fail  in  any  obligation  to 
be  found  in  the  acts  of  Congress  or  elsewhere. 

The  act  of  18 15,  which  provided  for  an  annual  tax  of  six  mill- 
ions of  dollars,  is  to  a  considerable  extent  a  literal  transcript  from 
the  two  acts  of  1813,  with  such  amendments  in  detail  as  experience 
or  the  proposed  permanency  of  the  tax  required,  but  with  no 
change  in  theory  or  in  general  procedure.  And  no  change  was 
made  by  the  act  of  1816,^  which  simply  repealed  the  provision  for 
an  annual  tax,  and  laid  instead  a  tax  of  three  millions  for  the 
current  year.  In  181 5,  and  also  in  18 16,  four  states  assumed 
the  payment  of  their  quotas ;  and  the  collection  was  made  by 
the  United  States  in  the  other  fourteen. 

When  the  levy  of  direct  taxation  by  apportionment  was  resorted 
to  for  the  fifth  time,  in  1861,  Congress  found  most  of  the  work  of 

^  §  6  of  the  act  of  August  2,  1813,  3  "Statutes  at  Large,"  p.  71.  For  the  painful 
effort  of  the  Committee  of  Ways  and  Means  to  arrive  at  a  county  apportionment,  see 
their  report,  "  State  Papers  on  Finance,"  ii.  628. 

-  "  State  Papers  on  Finance,"  ii.  860. 

*  The  act  of  January  9,  1815,  3  "Statutes  at  Large,"  p.  164;  the  act  of  March  5, 
1816,  ibid.,  p.  255. 


THE   DIRECT   TAX   OF    1861  lOI 

legislation  done  for  it  in  advance.  The  first  revenue  measure  of 
the  war  provided  for  an  annual  direct  tax  of  twenty  millions,^  to  be 
laid  on  the  value  of  lands  with  their  improvements  and  dwelling- 
houses,  "at  the  rate  each  of  them  is  worth  in  money."  In  its 
general  scheme  and  in  its  details,  the  act  of  1861  was  a  revised 
transcript  of  the  acts  of  1813  and  1815.  The  theory  enunciated 
in  Hylton  v.  United  States  was  unfamihar  to  many  members  ;  and 
the  Committee  of  Ways  and  Means  had  to  labor  in  debate  with 
representatives  who  wished  to  include  personal  estate,  or  incomes, 
among  the  objects  of  taxation.  The  Committee  itself  at  first 
treated  slaves  as  taxable  property,  as  was  done  in  the  earlier  acts. 
In  its  careful  provision  for  dealing  directly  with  the  individual 
citizen  of  the  United  States  and  for  enforcing  a  direct  lien  upon 
his  property,  the  law  of  1861  follows  the  earlier  legislation,  section 
by  section.  It  makes  the  same  provision  for  an  assumption  of 
quotas  by  the  respective  states  at  their  pleasure,  providing  that 
any  state  may  give  notice  of  its  intention  "  to  assume  and  pay,  or 
to  assess,  collect,  and  pay,"  the  direct  tax,  and  upon  payment  be 
entitled  to  a  deduction  of  fifteen  per  cent  in  lieu  of  the  costs  of 
assessment  and  collection.  The  date  for  giving  this  notice  was  the 
second  Tuesday  of  February,  1862,  and  the  expectation  that  the 
states  would  use  this  option  was  so  strong  that  the  act  postponed 
the  appointment  of  assessors  and  collectors  until  that  day.  But 
the  greater  completeness  of  the  optional  arrangement  does  not 
appear  to  import  any  change  in  the  real  bearing  of  the  act  as  lay- 
ing a  tax  upon  individual  citizens. 

The  recommendation  of  this  tax  to  the  attention  of  Congress 
by  Secretary  Chase,  in  his  report  of  July  4,  1861,  did  not  imply 
any  strong  reliance  upon  it.  Mr.  Chase  advised  the  raising  of 
"  twenty  millions,  for  the  current  year  at  least,  by  direct  taxes  or 
from  internal  duties  or  excises,  or  from  both."  It  is  probable 
that  both  the  Secretary  in  giving  this  advice  and  Congress  in  im- 
proving upon  it  were  influenced  by  the  fact  that  the  earlier  legis- 
lation   on  direct  taxation  could  be  made  available  quickly ,2  and 

^  The  act  of  August  5,  1861,  12  "Statutes  at  Large,"  p.  294. 

2  The  Chairman  of  the  Committee  of  Ways  and  Means,  Mr.  Thaddeus  Stevens,  felt 
no  mortification  when  Mr.  Roscoe  Conkling  stigmatized  the  bill  as  "undigested."  "It 
may  be  so,  for  it  was  a  direct  copy  of  one  drawn  by  a  man  who  was  less  wise  than  our 
critics  are  now.  It  was  drawn  by  Albert  Gallatin ;  and  this  undigested,  ill-considered 
bill  is  an  exact  copy  of  his."     Cong.  Globe,  1861,  p.  307.     Mr.  Collamer,  of  Vermont, 


102  •  ESSAYS 

that  time  was  needed  for  the  study  of  any  broader  system  of  in- 
ternal taxes.  The  direct  tax  had,  in  fact,  far  less  to  recommend 
it  in  1 86 1  than  at  the  beginning  of  the  century.  The  inequality 
of  apportionment  according  to  population,  serious  enough  at  first, 
had  been  increased  by  the  concentration  of  wealth  in  the  commer- 
cial and  manufacturing  states.  Only  the  smallness  of  the  sum  to 
be  raised  made  a  special  assessment  upon  one  species  of  property 
tolerable,  in  a  country  where  personal  property  had  multiplied  so 
greatly.  And,  finally,  the  slowness  of  the  method,  amply  shown 
by  four  trials,  unfitted  it  for  an  occasion  when  promptness  of  supply 
was  of  the  last  consequence.  But  all  of  the  action  at  the  special 
session  of  1861  was  essentially  provisional,  and  both  for  the  Secre- 
tary and  for  Congress  it  was  a  welcome  reflection  that  twelve  or 
fifteen  millions  could  be  added  to  the  regular  revenue  by  a  tried 
expedient  and  by  forms  already  settled. 

The  organization  of  the  internal  revenue  system  in  1862  ap- 
peared to  the  Senate  a  fit  occasion  for  repealing  the  direct  tax,  but 
not  so  to  the  House.  In  the  committee  of  conference  on  the 
internal  revenue  bill,  the  House  members  insisted  that  the  repeal 
would  release  real  estate  from  its  due  share  of  burdens,  and  would 
leave  the  whole  weight  of  taxation  to  be  borne  by  commerce  and 
manufactures  ;  and  the  difference  between  the  representatives  of 
the  two  Houses  was  so  great  that  the  bill  was  nearly  shipwrecked 
in  conference.^  But  the  House  receded  in  substance,  and  the 
Senate  in  form;  and  thus  the  act  of  July  i,  1862,  provided  (in 
§  1 19)  that  the  direct  tax  act  of  1861  should  be  held  to  authorize  the 
levy  and  collection  of  only  one  year's  tax,  and  that  no  other  should 
be  levied  under  the  said  act  until  April  i,  1865.  This  suspension 
of  levies  under  the  system  was  made  final  by  the  great  internal 
revenue  act  of  June  30,  1864,  which  (in  §  173)  provided  that  no 
further  direct  tax  should  be  assessed  until  Congress  should  "  enact 
another  law  requiring  such  assessment  or  collection  to  be  made." 
By  this  action,  proposed  by  the  Senate  and  accepted  without  demur 
by  the  House,  proceedings  under  the  direct  tax  of  1861  were 
finally  limited  to  the  levy  and  collection  of  a  tax  for  that  year  only. 

remarked  in  the  Senate  that  "  the  bill  is  essentially  the  same,  in  all  its  essential  features, 
with  the  bill  by  which  a  direct  tax  has  been  laid  four  times  in  this  government."  Ibid., 
p.  398. 

^  See  Mr.  Stevens's  statements  to  the  House,  June  23,  Globe.,  2890,  2891. 


THE   DIRECT   TAX   OF    1861  IO3 

The  results  of  the  levy  for  1861  can  be  considered  more  con- 
veniently if  we  separate  the  loyal  states  and  territories  from  those 
in  insurrection.  Of  the  former,  all  except  Delaware  and  Colorado 
territory  assumed  the  payment  of  their  quotas.  The  act  of  1861, 
following  the  precedents  of  18 13  and  181 5,  allowed  any  state  or 
territory,  upon  giving  due  notice,  to  assume  or  assess  "  in  its  own 
way  or  manner  "  its  quota,  with  a  deduction  of  fifteen  per  cent,  if 
payment  should  be  made  to  the  Treasury  before  July  i,  1862,  or 
of  ten  per  cent,  if  made  before  October  i,  with  the  provision  that 
such  quotas  might  be  satisfied  by  the  release  of  liquidated  and 
determined  claims  of  equal  amount  due  to  any  state  or  territory 
by  the  United  States.  The  settlement  of  the  quotas  by  this  pro- 
cess of  offset,  at  a  time  when  every  loyal  state  had  its  account 
against  the  general  government  for  military  services,  equipments, 
or  advances  of  some  sort,  and  the  slow  passage  of  such  accounts 
through  the  forms  of  the  Treasury,  no  doubt  makes  the  collection 
from  the  direct  tax,  as  given  in  the  published  tables,  appear  much 
slower  than  it  was  in  point  of  fact.^  Still,  it  can  probably  be  said 
with  truth  that  the  government  received  nothing  from  the  direct 
tax  during  the  war  which  it  would  not  have  received  otherwise. 
The  loyal  states  which  paid  their  quotas  in  services  and  equipments 
would  have  raised  as  many  men  and  have  equipped  them  as 
promptly  if  the  direct  tax  had  never  been  laid.  Their  quotas 
ultimately  gave  the  government  some  facility  for  the  adjustment 
of  their  accounts,  but  the  military  aid  on  which  the  quotas 
were  virtually  expended  was  not  called  out  by  taxation.  In 
Delaware  and  Colorado  the  tax  was  collected,  after  some  delay, 
by  the  internal  revenue  officers  of  the  United  States  ;  and,  except 
some  trifling  amounts  from  the  territories,  the  accounts  of  all  the 
other  loyal  states  and  territories  for  the  direct  tax  were  cleared. 
The  amount  assessed  upon  all  the  states  and  territories,  except 
the  eleven  states  in  insurrection  and  the  territory  of  Utah,  was 
^15,027,534.      Deducting  the    allowances   made  to    states   which 

^  The  annual  Finance  Report  states  the  receipts  from  direct  taxes  down  to  1870  as 
follows  :  — 

1862  ......  ;?i,795,332  1867 ^^4,200,234 

1863 1,485,104  1868 1,788,146 

1864 475,649  1869 765,686 

1865 1,200,573  1870 229,103 

1866 1,974.754 


104 


ESSAYS 


advanced  their  quotas,  the  amount  collected  from  the  loyal  states 
and  territories  appears  to  have  been  $12,937,805.^ 

There  remain  the  eleven  states  which  were  in  insurrection  when 
the  tax  was  laid,  and  the  territory  of  Utah.  More  than  one  of  the 
speakers  in  Congress  urged  as  a  recommendation  of  an  apportioned 
tax  that  the  amount  allotted  to  any  state  in  arms  against  the 
government  could  stand  over  for  ultimate  collection,  and  that  com- 
munities which  refused  to  contribute  to  the  revenue  in  any  other 
form  might  thus  be  made  to  yield  finally  a  share  of  direct  taxation. 
The  act  of  1861  accordingly  provided  (§  52)  that,  if  the  execution 
of  the  law  should  be  prevented  in  any  state  by  rebellion,  it  should 
be  the  duty  of  the  President,  "  so  soon  as  the  authority  of  the 
United  States  therein  is  reestablished,  to  collect  the  sums  due 
from  the  persons  residing  or  holding  property  or  stocks  therein," 
with  interest  for  delay.  Detailed  provision  was  made  and  special 
machinery  was  established  for  the  same  purpose  in  1862  by  the  act 
of  June  7,  "for  the  collection  of  direct  taxes  in  insurrectionary 
districts  within  the  United  States  and  for  other  purposes."  This 
act  made  full  provision  for  the  levy  of  the  tax  in  case  of  partial 
occupation  of  the  territory  of  any  state  by  the  forces  of  the 
United  States.  It  authorized  the  levy  upon  lands  in  insurrection- 
ary states  according  to  the  last  state  valuation,  and  charged  every 
parcel  accordingly  with  its  proportion  of  the  quota  of  the  state, 
and  with  a  penalty  of  fifty  per  cent  in  addition,  the  tax  and 
penalty  becoming  a  lien  upon  the  lands  in  all  states  or  parts  of 
states  declared  by  the  President,  by  due  proclamation,  to  be  in 
insurrection. 2  A  board  of  three  tax  commissioners  was  to  be 
appointed  for  every  insurrectionary  state,  to  enter  upon  their 
duties  whenever  the  commanding  general  entering  any  such  state 
"  shall  have  established  the  military  authority  of  the  United  States 
throughout  any  parish  or  district  or  county  of  the  same."  Sixty 
days  were  allowed  for  payment  by  the  owner  of  any  parcel  of  land 
after  the  amount  of  tax  due  upon  it  should  have  been  fixed  ;  and 

^  This  is  the  statement  for  February  18,  1888,  given  in  Cong.  Doc,  1887-1888, 
House  Reports,  No.  552,  p.  44,  deducting  $8409  overpaid  by  Wisconsin.  It  is  to  be 
observed  that  the  figures  given  cannot  be  reconciled  with  precision,  the  methods  of  ac- 
counting in  the  Treasury  having  been  inconsistent  ;   eg.  ibid.,  pp.  9,  15. 

2  The  proclamation  of  July  i,  1862,  declared  in  insurrection  the  eleven  states,  with 
the  exception  of  thirty-nine  counties  of  Virginia,  comprised  in  the  inchoate  State  of 
West  Virjiinia. 


THE   DIRECT    TAX    OF    1861  IO5 

thereupon  all  lands  upon  which  the  tax  was  unpaid  became  for- 
feited, and  the  commissioners  were  required  to  advertise  them  for 
sale  to  the  highest  bidder  and  to  strike  them  off  to  the  United 
States,  unless  some  person  should  bid  as  much  as  the  tax,  penalty, 
costs,  and  interest  for  delay  of  payment.  Provision  was  made  for 
the  redemption  of  property  thus  sold,  if  the  owner  or  any  person 
in  interest  should  appear  within  sixty  days  and  make  payment, 
taking  an  oath  to  support  the  Constitution  of  the  United  States. 
Redemption  within  one  year  was  allowed  to  any  owner  who  should 
be  unable  to  make  payment  by  reason  of  the  insurrection,  and 
should  have  taken  no  part  therein  after  the  passage  of  the  collec- 
tion act ;  and  two  years  for  redemption  were  allowed  to  absentees, 
aliens,  or  persons  under  legal  disability. 

Under  the  act  of  June  7,  1862,  commissioners  from  time  to 
time  made  assessments  for  the  direct  tax  in  about  one-half  of  the 
counties  in  the  eleven  states,  and  made  collections  in  all  those 
states  except  Alabama.^  Assessments  were  enforced  by  sales  of 
lands  for  taxes  in  districts  occupied  by  the  federal  forces  until  the 
order  of  the  Secretary  of  the  Treasury,  on  May  17,  1865,  sus- 
pending all  such  proceedings.  The  sales  were  necessarily  within 
narrow  areas,^  and  the  amount  received  from  the  sale  of  valuable 
properties  under  such  circumstances  was  trifling.^  After  the  sus- 
pension of  sales,  the  collection  still  went  on,  but  under  great 
difficulties,  caused  by  the  unsettled  and  impoverished  condition  of 
the  South.  Moderate  as  were  the  sums  called  for,  the  distress  of 
Southern  taxpayers  made  a  profound  impression.  The  Joint 
Committee  on  Reconstruction,  which  reported  the  fourteenth 
amendment  of  the  Constitution,  recommended  a  measure  whereby 
any  Southern  state,  upon  ratifying  the  amendment,  should  be 
empowered  to  assume  the  payment  of  such  part  of  the  direct  tax 

1  "Report  of  the  Commissioner  of  Internal  Revenue"  for  1S83,  in  Finance  Report, 
p.  165. 

2  The  sales  in  Virginia  were  in  the  counties  of  Alexandria,  Accomack,  and  North- 
ampton,—  that  is,  near  Washington  and  on  the  Eastern  Shore  ;  in  South  Carolina,  they 
were  confined  to  the  parishes  of  St.  Helena  and  St.  Luke,  in  the  Sea  Islands  ;  in  Florida, 
to  St.  Augustine  and  Fernandina  ;  in  Tennessee,  to  Memphis ;  and  in  Arkansas,  to 
Little  Rock. 

^  For  an  account  of  the  property  sold  in  Virginia,  Florida,  Arkansas,  and  Tennessee, 
with  the  valuation  of  each  parcel,  the  tax  due  thereon,  proceeds  of  sale,  and  other  par- 
ticulars, see  the  letter  from  the  acting  Secretary  of  the  Treasury,  February  26,  1883,  in 
Senate  Exec.  Doc,  No.  85,  of  1S82-1883. 


I06  ESSAYS 

assessed  upon  its  citizens  as  should  still  remain  unpaid,  with  per- 
mission for  postponing  the  payment  in  that  case  for  ten  years.^ 
The  House,  on  the  9th  of  July,  1866,  on  motion  of  Mr.  Boutwell, 
who  remarked  that  "  the  operation  of  collecting  what  remains 
uncollected  of  the  direct  tax  in  the  rebel  states  operates  more 
harshly  upon  our  friends  than  upon  our  enemies,"  inserted  a 
section  in  a  tariff  bill  of  that  session  suspending  that  operation 
until  January  i,  1868.  The  tariff  bill  did  not  reach  final  action ; 
but  the  Senate,  on  the  24th  of  July,  inserted  the  same  provision  at 
the  end  of  a  bill  to  protect  the  revenue  and  in  this  form  it  became 
a  law.2  The  Southern  states,  it  was  explained  in  the  Senate,  were 
proposing  to  assume  their  respective  quotas,  with  some  indulgence 
to  be  given  by  Congress  in  the  way  of  credit ;  and  it  was  deemed 
unwise  to  distress  individuals  by  the  regular  process  of  collection, 
when  the  whole  matter  could  be  arranged  on  easier  terms.  At  the 
next  session,  by  the  act  of  March  26,  1867,  the  Secretary  of  the 
Treasury  was  authorized  to  discontinue  the  employment  of  officers 
for  the  collection  of  direct  taxes  in  the  insurrectionary  states,  and 
to  turn  over  the  business  to  the  local  officers  of  internal  revenue. 
A  joint  resolution  of  July  23,  1868,  continued  the  suspension  of 
proceedings  until  January  i,  1869;  but  when  that  day  came,  no 
further  measures  were  taken  by  Congress  or  by  the  Executive,  and 
thus  the  further  collection  of  the  tax  was  practically  abandoned. 
Attention  to  the  subject  was  asked  for  by  the  Commissioner  of  Inter- 
nal Revenue  in  i868,'^  but  the  subject  had  clearly  become  too  much 
embarrassed  to  be  inviting.  It  is  clear,  however,  that  down  to  this 
time  the  government,  in  collecting  the  tax,  had  dealt  with  the 
individual  taxpayer  precisely  as  in  all  other  cases  of  taxation. 
The  privilege  of  assumption,  allowed  to  the  states  by  the  original 
act,  not  having  been  used,  had  expired  by  its  own  terms  ;  and,  as 
no  renewal  of  the  offer  was  made  by  the  United  States,  the  direct 
tax  continued  to  be  an  obligation  resting  upon  the  individual  when 
assessed,  secured  perhaps  by  a  lien  upon  his  land,  but  binding  upon 
no  other  person  or  body  of  persons  whatever. 

It  was,  perhaps,  owing  to  the  expectation  of  an  arrangement 

1  See  House  Reports,  1 865-1866,  No.  30,  p.  v. 

"^  See  Cong.  Globe  for  1865- 1866,  3692,  4068.     The  provision  is  §  14  of  the  act  of 
July  28,  1866. 

'  See  Finance  Report  for  1868,  p.  482. 


THE   DIRECT   TAX   OF    1861  10/ 

for  the  assumption  of  unpaid  quotas  by  the  Southern  states  that 
the  First  Comptroller  of  the  Treasury,  in  a  statement  of  accounts 
between  the  general  government  and  the  several  insurrectionary 
States  on  May  20,  1868,  charged  them  with  their  respective  quotas 
as  if  some  legal  liability  therefor  rested  upon  them.  This  view  of 
the  case,  although  not  uniformly  followed  by  subsequent  comp- 
trollers/ appears  for  many  years  to  have  fixed  the  construction  of 
the  law  for  the  accounting  officers  in  the  Treasury.^  The  states 
being  charged  each  with  its  unpaid  balance  of  direct  tax,  moneys 
becoming  due  to  them  from  the  general  government  upon  other 
accounts,  as  from  the  sale  of  public  lands  in  which  they  were 
interested  jointly  with  the  government,  were  not  paid  over,  but 
were  credited  to  them  by  way  of  offset.  The  extreme  point  in  this 
official  confusion  was  reached  when,  in  1883,  the  First  Comp- 
troller decided  that  the  sum  of  ^35,555,  appropriated  by  act  of 
Congress  to  refund  to  the  state  of  Georgia  money  expended  by 
her  for  the  common  defence  in  1777,  should  be  paid  to  the  Treas- 
urer of  the  United  States,  "  to  the  credit  of  the  state  of  Georgia 
on  account  of  direct  taxes  charged  against  the  state."  ^  As  far  as 
a  government  can  be  said  to  remember  or  forget,  the  government 
of  the  United  States  must  be  said  at  this  juncture  to  have  forgotten 
what  it  meant  by  the  direct  tax  of  1861.  The  true  meaning  of  the 
tax  was  settled,  however,  by  the  highest  authority,  and  the  whole 
subject  placed  in  its  true  light,  when  the  Supreme  Court  of  the 
United  States,  in  the  case  of  the  United  States  v.  Louisiana,  at  the 
October  term,  1887,*  decided  that  the  direct  tax  law  in  1861  did  not 
create  any  liability  on  the  part  of  a  state  to  pay  the  tax,  and  that 
the  apportionment  merely  designated  the  amount  to  be  levied  upon 
the  property  of  individuals  in  the  several  states  without  any  liabil- 

1  See  the  important  adverse  decision  by  A.  G.  Porter,  First  Comptroller,  giving  the 
legislation  from  1798  and  much  documentary  matter.     Senate  Exec.  Doc,  1879,  No.  24. 

2  See  House  Exec.  Doc,  1885-18S6,  No.  15S,  p.  15. 

"It  must  be  acknowledged  that  this  construction  of  the  law  appears  not  to  conform 
to  the  intention  of  the  acts  upon  this  subject ;  but  the  decision  fixing  it  aj  a  state  debt 
has  such  force  in  the  Treasury  Department  as  to  preclude  any  other  view  of  the  direct 
tax  than  that  of  a  debt  due  by  the  state.  ...  If  the  state  owes  the  debt,  the  land- 
owner does  not  owe  it."     Ibid.,  p.  17. 

3  4  "Decisions  of  the  First  Comptroller,"  House  Miscell.  Doc,  1883-1884,  No.  56, 

P-  354- 

*  123  United  States,  37.  The  opinion  of  the  court  was  given  by  Field,  J.,  no  one 
dissenting. 


io8 


ESSAYS 


ity  attaching  to  the  state  in  its  political  and  corporate  character. 
This  decision  finally  leaves  the  unpaid  quotas  of  the  direct  tax  in 
precisely  the  same  position  as  any  other  tax  assessed  upon  indi- 
viduals, which  the  United  States  government  has  been  unable,  or 
has  neglected,  to  collect  in  full.  It  is  difficult,  for  example,  to 
distinguish  it  in  any  essential  particular  from  the  case  of  unpaid 
income  taxes  laid  during  the  war  and  collected  by  severe  process 
throughout  the  loyal  states,  but  neither  then  nor  at  any  other 
time  collected  in  the  insurrectionary  states. 

This  decision  plainly  makes  it  necessary,  in  determining  the 
amount  still  unpaid  on  the  quotas  of  the  Southern  states,  to  dis- 
regard all  the  accounts  with  tax  commissioners  and  with  states, 
and  to  set  down  simply  the  amount  of  taxes  reported  as  uncollected. 
These  are  the  amounts  due  from  individuals ;  and,  as  no  individual 
owes  any  more  than  the  due  assessment  upon  his  property,  by 
reason  of  any  other  person's  default,  so  no  individual  owes  any 
less  than  that  assessment,  because  of  money  stopped  on  its  way  to 
the  state  Treasury,  or  otherwise  coming  to  the  United  States  from 
any  of  his  fellow-citizens.  The  amounts  reported  as  remaining 
uncollected,^  in  the  eleven  insurrectionary  states  and  in  Utah,  are 
given  in  the  following  table  :  — 


Quotas 

Uncollected 

Quotas 

Uncollected 

Alabama 

^529,313 

$529,313 

N.  Carolina, 

$576,195 

$198,742 

Arkansas     . 

261,886 

107,185 

S.  Carolina, 

363,571 

141,174 

Florida   .     . 

77,523 

72,762 

Tennessee, 

669,498 

277,506 

Georgia  .     . 

586,367 

501,940 

Texas,   . 

355,107 

174,265 

Louisiana    . 

385,887 

71,386 

Virginia,     . 

729,071 

286,663 

Mississippi  . 

413,085 

343-500 

Utah,     .     . 

26,982 

26,982 

$4,972,485  $2,731,418 

The  process  of  collection  in  the  insurrectionary  states  during 
the  war  by  assessment  and  sale  of  property  in  limited  districts, 
under  the  act  of  June  7,  1862,  caused  great  hardship  to  dispos- 

^  These  sums  are  taken  from  the  accounts  stated  by  a  commission,  appointed  by 
Secretary  Manning  in  1885,  to  investigate  and  adjust  all  the  direct  tax  accounts.  House 
Exec.  Doc,  1S85-1886,  No.  158.  See  particularly  pp.  24-31  and  7-12.  The  sums  found 
by  this  commission  to  be  still  due  differ  from  the  amounts  stated  by  Secretary  Folger  in 
1884  and  from  the  statement  made  by  the  Commissioner  of  Internal  Revenue  in  1885, 
and  the  Secretary  and  the  Commissioner  also  differed  from  each  other.  Ibid.,  pp.  14,  15, 
The  report  of  the  commission  appears  to  have  been  adopted  in  the  Register's  office.  See 
House  Reports,  1887-18S8,  No.  552,  p.  41. 


THE   DIRECT   TAX   OF    1861  IO9 

sessed  owners ;  but  this  was  buried  and  lost  sight  of  in  the  vast 
destruction  of  property  and  the  widespread  ruin  which  marked 
the  track  of  contending  armies.  In  South  Carolina,  especially, 
this  process  led  to  complications  which  must  be  noticed  briefly  as 
an  important  element  in  the  general  confusion  caused  by  the  tax. 
The  act  of  1862,  as  has  been  said,  authorized  the  tax  commission- 
ers, where  property  was  sold  in  the  insurrectionary  districts  for 
the  tax,  to  strike  it  off  for  the  United  States,  if  no  other  bidder 
offered  more  than  the  tax  and  penalty  with  interest.  Under  an 
act  of  February  6,  1863,  the  commissioners  were  authorized  to 
bid  on  behalf  of  the  United  States  as  high  as  two-thirds  of  the 
assessed  value  of  the  property.  Lands  struck  off  to  the  United 
States  the  commissioners  were  empowered  to  lease  until  the 
reestablishment  of  civil  government,  or,  under  the  direction  of 
the  President,  to  sell  in  limited  parcels  to  loyal  citizens  or  to 
persons  who  had  served  in  the  army  or  navy,  only  one-fourth  of 
the  purchase  money  being  required  in  cash  from  army  or  navy 
purchasers ;  and  the  proceeds  of  leases  and  sales  were  to  be  paid 
into  the  Treasury  of  the  United  States,  one-half  thereof  to  be  paid 
over  ultimately  to  the  reestablished  state  governments  for  specified 
purposes. 

The  special  application  of  these  provisions  to  the  case  of  South 
Carolina  was  affected  by  the  peculiar  circumstances  under  which 
the  forces  of  the  United  States  held  the  abandoned  Sea  Islands 
with  their  valuable  cotton  lands,  and  by  the  great  numbers  of 
colored  people  collected  there.  The  lands  sold  for  taxes  were  there 
held  and  managed  from  the  first  with  necessary  reference  to  the 
employment  and  well-being  of  the  black  population.  To  this  end, 
instructions  were  issued  by  President  Lincoln,  September  16,  1863, 
which,  besides  regulating  the  sale  of  land  to  persons  of  the  army 
and  navy,  required  certain  plantations  to  be  sold  in  five-acre  lots, 
set  apart  others  to  be  leased  and  the  rents  to  be  used  for  school 
purposes,  and  a  further  large  number  to  be  divided  into  twenty- 
acre  lots,  to  be  sold  *'  to  the  heads  of  families  of  the  African 
race."  ^  Under  these  arrangements,  some  lands,  bought  in  at  the 
tax  sales  for  the  United  States,  remained  for  several  years  in  the 
possession    of   the   government ;    others  were  resold   at   a   large 

^  These  instructions,  with  a  variety  of  other  documents,  are  annexed  to  the  report 
•of  A.  G.  Porter,  First  Comptroller,  in  Senate  Exec.  Doc.  of  1879,  No.  24,  p.  223. 


no  ESSAYS 

advance;  others  still,  having  been  sold  and  partly  paid  for, 
reverted  to  the  government,  and  were  resold  or  remained  in  its 
possession.  The  transactions  became  involved,  litigation  sprung 
up,  and  it  became  plainly  impossible  for  the  government  to  man- 
age its  complicated  interests  in  the  Sea  Islands  with  advantage. 
Congress,  therefore,  by  a  general  act,  dated  June  8,  1872,  with 
judicious  liberality  provided  that  any  lands  owned  or  held  by  the 
United  States,  under  the  collection  act  of  June  7,  1862,  and  the 
subsequent  proceedings,  and  not  used  for  pubhc  purposes,  might 
be  redeemed  by  the  original  parties  in  interest  or  their  representa- 
tives at  any  time  within  two  years,  upon  payment  of  the  tax  and 
costs,  with  interest  at  the  rate  of  ten  per  cent,  saving  the  rights 
of  all  persons  who  might  in  the  meantime  have  made  valuable 
improvements.  Lands  not  redeemed  at  the  end  of  the  two  years 
were  to  be  sold  by  public  auction,  but  by  subsequent  acts  the 
period  for  redemption  was  extended  to  February,  1877.  The 
school  farms  spoken  of  above  were  not  covered  by  this  act,  but 
were  similarly  provided  for  by  the  act  of  March  3,  1887,  which 
closed  a  troublesome  and  exceptional  piece  of  administration. 

The  result  of  these  operations  is  that,  the  quota  of  South  Caro- 
lina being  $363,571,  of  which  $14 1,1 74 remains  unpaid,  theTreasury 
of  the  United  States  appears  to  have  received  in  cash  $468,864, 
besides  sums  amounting  to  $134,592  paid  to  the  Freedmen's 
Bureau  and  otherwise  disbursed  on  various  accounts,  of  which  a 
part  should  no  doubt  be  added  to  the  sums  accumulated  in  the 
Treasury  as  the  result  of  the  tax  sales.  That  the  former  owners 
of  the  lands  have  no  claim  to  this  fund  as  against  the  govern- 
ment goes  almost  without  saying.  At  the  same  time,  it  is  clear 
that,  whatever  else  the  government  may  do  as  to  the  direct 
tax,  this  is  not  money  to  be  retained  by  a  great  and  generous 
nation.^ 

It  has  been  seen  that  the  decision  of  the  Supreme  Court  in  the 
Louisiana  case  finally  brought  the  direct  tax  of  1861  back  to  its 
proper  position  as  a  tax  laid  by  the  United  States  upon  its  individual 
citizens  and  imperfectly  collected  by  reason  of  the  Civil  War.  The 
default  in  its  collection  being  a  default  of  less  than  one-seventh  of 
the  total  amount  called  for,  it  is  probable  that  this  tax  has  been 
more  completely  collected  than  most  of  those  laid  during  the  war. 

^  See  the  remarks  of  Mr.  Sherman,  p.  1 14,  below,  note. 


THE   DIRECT   TAX   OF    1861  III 

For  example,  it  has  probably  been  collected  more  thoroughly  than 
the  income  tax,  the  foundation  of  which  was  laid  by  the  same  act 
which  estabhshed  the  direct  tax ;  and  it  is  not  hkely  that  anything 
but  an  overflowing  treasury  would  have  enabled  Congress  to  see 
in  the  one  case  more  than  in  the  other  an  occasion  for  remedial 
legislation.  Under  any  other  conditions  it  is  likely  that  the  un- 
collected ;^2, 730,000  of  direct  tax  would  by  common  consent  have 
been  treated  as  an  insignificant  detail  in  a  great  mass  of  incurable 
irregularities  left  behind  by  four  years  of  civil  war.  The  question 
as  to  the  possibility  and  expediency  of  clearing  up  this  special 
case  of  fiscal  confusion  having  been  raised,  however,  it  must  be 
admitted  that  the  solution  of  it  is  not  simple,  and  that  the  division 
of  opinion  created  is  not  unnatural. 

Three  modes  of  dealing  with  the  subject  have  been  suggested. 
First  is  that  proposed  by  the  Commissioner  of  Internal  Revenue 
in  1883,^  "that  measures  be  taken,  as  soon  as  possible,  to  collect 
the  balance  of  the  tax,"  on  the  ground  that  "  exacting  a  direct  tax 
from  one  landowner  and  permitting  the  tax  upon  the  land  adjoin- 
ing to  remain  unpaid  is  not  equitable."  The  reason  is  undeniable  ; 
but,  after  all,  could  equity  be  secured  now  by  resuming  the  col- 
lection of  a  tax,  all  proceedings  under  which  have  been  suspended 
for  twenty  years  .''  The  condition  of  landed  property  has  altered, 
in  one  place  for  the  better  and  in  another  for  the  worse,  through- 
out the  states  concerned ;  the  rights  in  such  property  have 
changed  hands,  and  all  the  relations  once  existing  between  the 
individual  members  of  any  body  of  taxpayers  and  forming  the 
basis  cf  possible  equity  in  1861  have  vanished.  A  large  part  of 
the  individuals  themselves  have  disappeared.  To  levy  upon  the 
lands  on  which  the  tax  is  unpaid  would  be,  in  a  great  proportion 
of  cases,  to  collect  a  tax  from  subsequent  purchasers  under  a  claim 
which  they  were  justified  in  believing  that  the  government  had 
abandoned  long  ago.  It  has  been  declared  with  great  positive- 
ness  that  the  government  has  lost  its  hold  upon  the  land,  but  this 
point  need  not  be  considered.  If  the  government  still  retains  the 
right  of  assessment  on  the  lands  of  delinquents,  the  exercise  of 
that  right  upon  the  lands  as  now  owned  and  used  would  be 
universally  recognized  as  too  difficult  and  too  certainly  unjust,  as 
between   members    of  the  same  community,  to  be  an  admissible 

1  Finance  Report,  1883,  P-  ^^T- 


112  ESSAYS 

expedient.  The  cure  of  the  difficulty  by  the  first  method  appears, 
then,  to  be  out  of  the  question. 

The  second  mode  of  dealing  with  the  case,  the  opposite  of  that 
just  considered,  is  to  return  such  taxes  as  have  been  paid  under 
the  legislation  of  1861,  and  to  remit  all  that  are  unpaid.  In  other 
words,  equity  being  unattainable  by  completing  the  levy,  secure  it 
by  undoing  what  has  been  done.  It  is  not  within  the  proposed 
scope  of  this  paper  to  discuss  the  constitutional  question  as  to  the 
right  of  Congress  to  lay  taxes,  let  us  say  in  1890,  in  order  to  re- 
fund taxes  which  were  properly  levied  and  collected  according  to 
law  in  1 862- 1 866.  We  are  here  concerned  solely  with  the  proposi- 
tion to  remedy  the  inequality  resulting  from  the  failure  to  collect 
from  all  of  the  taxpayers  in  1862  and  the  years  following.  Un- 
deniably, if  there  were  no  question  except  one  of  bookkeeping 
between  the  states  of  the  Union,  as  the  Treasury  has  sometimes 
seemed  to  suppose,  the  process  of  crediting  every  state  with  an 
amount  equal  to  its  quota  would  finally  close  the  accounts  and 
produce  equality  in  that  sense.  But  the  only  question  really  open, 
under  the  circumstances,  is  that  of  producing  equality  among  the 
taxpayers ;  and  this  object  it  appears  to  be  impossible  to  secure 
by  any  process  of  refunding.  If,  of  two  men,  one  paid  his  tax 
twenty-five  years  ago  and  the  other  has  never  paid  it,  it  is  im- 
possible to  restore  equality  by  simply  returning  to  the  former  that 
which  has  been  detained  from  him  for  a  quarter  of  a  century. 
And  if  a  third,  when  assessed,  suffered  the  collection  of  the  tax 
by  a  forced  sale  of  his  land  for  a  fraction  of  its  value,  he  is  not 
placed  on  the  same  footing  with  either  of  the  others,  by  returning 
to  him  or  his  heirs  the  amount  of  the  tax  or  even  the  proceeds  of 
the  tax  sale.  In  short,  when  the  tax-collector  has  done  a  part  of 
his  work  by  compulsory  process  and  time  has  elapsed,  an  equitable 
adjustment  between  individuals  becomes  impossible.  Refunding 
the  tax  may  satisfy  the  mere  formal  accountant,  but  it  does  not 
undo  the  past  or  its  consequences  ;  and,  so  far  as  the  object  sought 
is  the  equalizing  of  burdens,  such  a  measure  is  nearly  nugatory. 

It  is,  at  any  rate,  so  nearly  nugatory  that  there  may  be  a  grave 
question  whether,  in  the  attempt  to  cure  one  set  of  inequalities  by 
a  distribution  of  money,  a  greater  set  does  not  spring  out  of  the 
process  of  raising  the  money.  It  was  contended  in  debate  in 
Congress  that  the  taxes  collected  in  1890,  after  the  growth  of  the 


THE   DIRECT   TAX   OF   1861  II3 

states  has  changed  their  relative  places  in  population  and  wealth, 
would  not  rest  upon  them  in  the  proportion  in  which  the  contribu- 
tions of  1 862-1866  must  be  returned.  Kansas,  it  was  said  by  one 
gentleman,  will  pay  toward  the  refunding  operation  not  less  than 
$340,000,  but  will  receive  less  than  1^72,000;  New  Hampshire, 
it  was  said  in  the  Senate,  will  receive  but  $185,000,  and  will  con- 
tribute at  least  $300,000.  The  incidence  of  our  taxation  is  too 
uncertain  to  make  these  calculations  important ;  and,  in  most 
cases  of  expenditure  for  pubhc  objects,  such  considerations  as  to 
the  exact  balance  of  benefits  and  burdens  are  properly  disregarded. 
But  the  present  is  a  case  in  which  the  attempt  to  restore  such  a 
balance  with  respect  to  a  particular  transaction  is  the  main  propo- 
sition ;  and  it  therefore  becomes  not  only  justifiable,  but  necessary, 
to  inquire  whether  the  proposed  equality  would  be  real  or  only 
apparent.  The  answer  to  this  question  is  found  in  the  census 
tables,  where  the  redistribution  of  taxpaying  power  in  the  last 
quarter  of  a  century  is  too  manifest  to  require  recital. 

The  third  method  of  dealing  with  the  subject  would  be,  if  we  can 
neither  complete  the  collection  nor  return  the  tax  without  produc- 
ing fresh  mischief,  to  leave  the  matter  where  it  is.  No  doubt 
this  course,  as  well  as  the  others,  is  open  to  objection.  It  is  a 
peculiarity  of  the  case  that  the  United  States  can  neither  act  nor 
refrain  from  acting  in  it  without  running  counter  to  some  instinct 
of  justice.  But  there  would  be  less  disturbance  of  existing  inter- 
ests, and  time  would  heal  all  difficulties  more  quickly,  it  is  probable, 
if  it  were  frankly  recognized  that,  in  such  matters,  the  errors  or 
misfortunes  of  the  past  are  finally  beyond  all  remedy.  The  funds 
which  have  been  collected  from  the  proceeds  of  lands  leased  or 
resold,  or  from  the  surplus  of  tax  sales,  might  be  returned  to  the 
parties  representing  the  original  ownership,  and  the  account  of 
the  direct  tax  could  then  be  wound  up,  as  that  of  the  other  taxes 
of  the  war  has  been,  without  further  inquiry  as  to  the  degree  in 
which  different  bodies  of  citizens  contributed  to  them. 

It  is  the  second  of  these  methods,  however,  which  has  secured 
the  approval  of  Congress.  The  bill  which  was  passed  last  winter, 
vetoed  by  the  President  and  passed  over  the  veto  by  the  Senate 
in  the  closing  hours  of  the  session,  was  the  fruit  of  an  agitation 
which  has  been  in  progress  in  different  forms  for  ten  years,  and 
has  developed  a  strong  appetite  among  the  state  governments  for 


114 


ESSAYS 


the  refunding  of  their  quotas.  The  bill  required  the  Secretary  of 
the  Treasury  to  credit  every  state  and  territory  and  the  District 
of  Columbia  with  a  sum  equal  to  all  collections  made  from  it  or 
its  citizens,  by  set-off  or  otherwise,  and  to  remit  all  sums  remain- 
ing unpaid  ;  and  appropriated  the  money  necessary  to  pay  all  sums 
thus  becoming  due  from  the  Treasury ;  it  being  provided,  how- 
ever, that  sums  which  have  been  collected  in  any  state  from  citi- 
zens, directly  or  by  sale  of  property,  should  be  held  in  trust  by 
the  state  government  for  the  benefit  of  the  persons  from  whom 
collection  was  made,  or  their  representatives.  It  was  also  pro- 
vided that  the  owners  of  lands  sold  in  the  parishes  of  Saint 
Helena  and  Saint  Luke's  in  South  Carolina  should  be  paid  the 
value  of  their  lands,  —  to  the  owners  of  lots  in  the  town  of  Beau- 
fort one-half  of  the  value  assessed  by  the  direct  tax  commissioners, 
to  the  owners  of  cultivated  lands  five  dollars  per  acre,  and  to  the 
owners  of  other  lands  one  dollar  per  acre,  with  the  proper  excep- 
tions as  to  lands  heretofore  redeemed.  The  purchase  money 
received  on  account  of  uncompleted  sales  to  persons  in  the  army 
and  navy  was  to  be  returned  to  the  persons  paying  it.  For  all 
these  purposes  $500,000  was  to  be  appropriated,  including  in  this 
sum  moneys  in  the  Treasury  derived  in  any  way  from  the  en- 
forcement of  the  tax.i  And,  finally,  moneys  received  from  the 
sale  of  lands  bid  in  for  the  United  States  at  tax  sales  in  any 
state,  in  excess  of  the  taxes  assessed,  were  to  be  paid  to  the  own- 
ers of  the  land  bid  in  and  resold,  or  to  their  representatives. 

This  bill  was  not  reached  by  the  House  of  Representatives 
after  the  veto,  and  therefore  failed  to  become  a  law.  There  can 
be  little  doubt  that  it  will  be  passed  by  the  present  Congress.^  It 
is  sufficiently  clear  from  its  terms  that  the  combination  of  local 
interests  in   its  support  is  powerful,  and  it   has   every   political 

^  As  passed  by  the  House,  the  bill  proposed  to  pay  the  dispossessed  owners  accord- 
ing to  the  valuation  of  i860,  and  appropriated  $850,000  for  the  purpose.  The  rate  and 
amount  were  cut  down  in  conference  to  meet  the  views  of  the  Senate.  On  the  adop- 
tion of  the  report  of  the  conference  committee,  Mr.  Sherman  made  this  explanation  : 
"  Upon  the  first  sale  for  direct  taxes,  the  land  was  bid  in,  I  think,  at  some  $  13,000,  which 
we  credited  to  the  state  of  South  Carolina  ;  and  it  was  subsequently  resold  by  the 
United  States  for  ^455,000.  So,  after  all,  the  money  we  are  to  pay  back  to  the  owners 
of  this  land  in  South  Carolina  is  only  about  the  sum  that  we  received  on  the  resale  of  the 
land."      Con^.  Record,  1888- 1 889,  p.  2139. 

2  [This  expectation  was  exactly  realized  by  the  act  of  March  2,  1891.  —  Editor's 
Note.] 


THE   DIRECT   TAX   OF    1861  II5 

chance  in  its  favor.  The  passage  of  the  measure,  whenever  it 
comes,  will  close  a  singular  chapter  in  the  history  of  taxation, — 
a  chapter  the  repetition  of  which,  we  may  be  sure,  our  people  will 
not  be  easily  tempted  to  risk  hereafter.  The  direct  tax  provided 
for  by  the  Constitution  has  at  last  been  effectually  discredited  as 
a  source  of  revenue,  and  it  has  also  been  too  prolific  of  misconcep- 
tion and  confusion  to  have  any  interest  henceforth  as  a  practical 
measure  of  finance. 


THE   NEW   INCOME   TAXi 

By  the  tariff  act  of  1894  the  United  States  government,  for  the 
second  time  in  its  existence,  undertakes  the  levy  of  an  income  tax. 
The  future  student  of  our  history  will  probably  have  a  moment 
of  mental  embarrassment  when  he  finds  the  provision  for  laying 
this  novel  burden  upon  the  taxpayer  in  "  an  act  to  reduce  taxation, 
to  furnish  revenue  for  the  government,  and  for  other  purposes." 
His  difficulty  in  comprehending  the  real  significance  of  the  measure 
will  not  be  lessened  when  he  attempts  to  trace  the  legislative  his- 
tory of  the  act.  He  will  not  find  the  explanation  in  any  exigency 
of  the  Treasury,  where  the  first-fruits  of  the  tax  cannot  be  received 
before  July,  1895.  He  will  not  find  it  in  the  avowed  policy  or  the 
unavowed  political  needs  of  either  of  the  great  parties,  both  of 
which  found  themselves  deeply  divided  by  the  proposition  for  the 
tax.  He  will  be  Hkely  to  ascribe  the  easy  acquiescence  of  a  con- 
siderable section  on  each  side  in  Congress  to  the  presence  of  an 
ill-defined  notion  that  the  people  are  about  to  demand  some  drastic 
action  for  depleting  the  well-to-do  classes,  and  to  the  habitual  dread 
with  which  most  politicians  for  a  time  listen  to  the  demands  of 
any  new  political  movement,  like  that  of  the  Populists.  At  any 
rate,  it  will  be  clear  that  the  considerations  which  weighed  with 
Congress  in  taking  this  important  step  were  not  fiscal,  and  that 
the  provisions  of  the  new  act  were  not  studied  and  perfected  by 
its  framers  from  this  point  of  view.  The  very  fact  that  the  limit 
of  exemption  is  set  so  high  as  $4000  will  be  a  standing  demon- 
stration that  the  measure  was  shaped  to  meet  some  supposed  social 
or  reformatory  end,  possibly  with  some  sectional  bearing,  but,  at 
any  rate,  not  as  the  best  result  of  either  modern  theory  or  modern 
practice. 

It  is  a  great  misfortune  that  the  question  of  a  fresh  resort  to 
the  income  tax  should  have  come  up  under  such  untoward  circum- 

1  Quarterly  /ournal  of  Economics,  October,  1 894. 
116 


THE   NEW   INCOME   TAX  II7 

stances,  and  that  it  should  have  received  such  a  solution  as  this. 
The  question  is  of  too  great  importance  to  be  disposed  of  with  so 
little  real  study  as  it  received  from  Congress,  and  the  income  tax 
is  too  important  a  resource  to  be  discredited  in  the  public  mind  by 
the  working  of  an  imperfect  and  crude  system.  The  subject  was 
one  for  the  best  and  most  careful  thought  of  the  legislator,  in  the 
light  of  the  important  body  of  practice  to  be  found  in  other  coun- 
tries as  well  as  our  own.  So  far  from  the  careful  examination 
which  it  required,  the  matter  has  had  only  a  snap  judgment,  and  the 
probability  of  any  thorough  treatment  of  it  by  our  government  is 
indefinitely  removed.  In  the  minds  of  a  large  part  of  our  people 
the  income  tax  will  be  more  thoroughly  identified  than  ever  with  the 
system  in  vogue  during  the  Civil  War ;  and  five  years  hence  they 
will  seem  to  have  had  a  fresh  trial  and  bitter  experience  of  the  income 
tax,  when,  after  all,  it  is  only  an  income  tax  —  and  that  a  badly 
devised  one  —  which  they  have  seen  apphed  for  the  second  time. 

The  language  used  above,  no  doubt,  implies  a  certain  accept- 
ance of  the  general  theory  of  taxing  income.  There  is  good 
reason  for  the  agreement  between  the  theoretical  views  of  so 
many  economists  on  this  subject  and  the  instinctive  popular 
belief,  which  is  so  often  met.  It  is,  after  all,  the  aggregate 
income  of  society  which  supplies  the  fund,  and  determines  an 
upper  limit,  for  public  expenditure ;  and  it  is  the  income  of 
each  individual  member  of  the  society  which  supplies  the  fund,  and 
determines  the  limits,  for  his  contribution  to  that  expenditure. 
Every  tax,  says  Adam  Smith,  must  be  paid  from  one  or  other 
of  the  sorts  of  revenue  which  make  up  the  private  revenues  of 
individuals ;  and  his  maxim  which  follows,  to  the  effect  that  the 
subjects  of  a  state  ought  to  contribute  to  its  support  as  nearly 
as  possible  in  proportion  to  the  revenue  which  they  respectively 
enjoy,  although  sometimes  treated  as  a  sounding  truism,  is,  at  any 
rate,  unavoidable.  So  far  the  economist  and  the  simple  poll-tax 
payer  may  very  well  agree.  The  former  makes  his  reservation  as 
to  the  difficulties,  or  even  impossibility,  of  just  administration,  as 
Mill  did  when  he  "  feared  that  the  fairness  which  belongs  to  the 
principle  of  an  income  tax  cannot  be  made  to  attach  to  it  in  prac- 
tice, and  that  this  tax,  while  apparently  the  most  just  of  all  modes 
of  raising  a  revenue,  is,  in  effect,  more  unjust  than  many  others 
which  are  prima  facie  more  objectionable."     To  the  payer  of  the 


H8  ESSAYS 

poll-tax,  however,  it  appears  that  the  power  of  government  is  equal 
to  every  task,  and  that  strict  laws  and  severe  penalties  will  readily 
accomplish  the  work  of  complete  and  just  assessment.  Without 
accepting  this  Utopian  view  of  the  omnipotence  of  human  law, 
which  is  certainly  no  more  true  in  the  case  of  taxation  than  in  any 
other  of  the  operations  of  government,  we  may  at  least  urge  that 
it  is  sometimes  worth  while  to  inquire  how  close  an  approximation 
to  administrative  perfection  can  be  made.  It  is  the  judgment  of 
some  important  and  enlightened  countries,  as,  for  example,  of  Eng- 
land and  Prussia,  that,  without  attaining  absolute  success,  they  make 
an  approximation  near  enough  to  justice  to  make  it  worth  their 
while,  under  every  change  of  administration,  to  maintain  a  tax 
upon  incomes  as  a  branch  of  their  regular  revenue.  The  question 
whether  the  United  States  cannot  do  the  same  thing  appears  to  be 
of  some  interest.  If  this  government  can  make  such  an  approxi- 
mation, the  direct  resort  to  the  actual  source  of  all  taxation  has 
much  to  recommend  it  in  this  country. 

The  most  striking  defect  in  the  financial  system  of  the  United 
States  is  the  want  of  some  easy  adjustment  of  the  receipts  of  the 
government.  As  a  result  of  those  circumstances  which  have  made 
the  customs  duties  our  chief  reliance,  the  Treasury  may  sometimes 
have  a  plethora  when  a  prosperous  business  swells  our  imports, 
and  sometimes  a  dearth  when  the  course  of  trade  changes  ;  but  in 
neither  case  have  we  any  important  elastic  branch  of  taxation, 
which  can  be  relied  upon  to  lower  a  surplus  or  fill  up  a  deficit  at 
short  notice.  Neither  customs  nor  excise  duties  can  be  used  for 
this  purpose  without  serious  disturbance  and  friction.  England,  as 
is  well  known,  meets  the  analogous  difficulty  —  caused  by  fluctu- 
ations, not  in  her  receipts,  but  in  her  expenditures  —  by  the 
adjustment  of  the  income  tax.  Continental  writers  and  statesmen 
have  long  pointed  with  envy  to  this  unfailing  resource  of  the 
Chancellor  of  the  Exchequer.  With  a  tax  for  which  the  adminis- 
trative machinery  is  permanent,  but  the  rate  is  fixed  for  only  one 
year  at  a  time,  it  is  easy  and  usual,  even  after  the  fiscal  year  has 
begun,  to  meet  unexpected  changes  in  affairs  by  a  change  in  this 
variable  element  of  revenue,  —  a  change  which  takes  instant  effect. 
This  use  of  the  income  tax,  together  with  the  power  given  to  the 
government  to  borrow  on  short  time  in  anticipation  of  receipts,  is, 
in  large  part,  the  explanation  of  the  singularly  close  calculation 


THE    NEW    INCOME    TAX  II9 

and  the  small  balances  of  cash  with  which  the  English  Exchequer 
is  habitually  managed.  The  circumstances  of  the  United  States, 
and  the  unavoidable  difference  in  our  leading  sources  of  taxation, 
make  it  unlikely  that  this  generation  or  the  next  will  see  any  simi- 
lar administrative  success  here  ;  but  a  much  closer  adjustment  of 
revenue  to  actual  needs  than  we  have  at  present  could  be  attained 
by  the  use  of  a  well-arranged  and  quickly  movable  tax  on  incomes, 
as  a  part  of  our  ordinary  revenue.  Thus  a  proper  income  tax 
appears  to  have  uses  which  make  it  desirable  to  have  its  practica- 
bihty  more  carefully  studied. 

When  we  pass  from  the  case  of  ordinary  revenue,  and  consider 
the  sources  of  supply  for  emergencies,  a  well-constituted  income 
tax  has  a  still  greater  importance.  Even  writers  who  would  rule  it 
out  from  the  everyday  practice  of  a  government,  by  reason  of  the 
manifest  difficulty  of  justly  administering  it,  will  accept  it  as  a  proper 
provision  for  sudden  and  severe  stress.  In  the  presence  of  a  great 
public  exigency  the  inequalities  of  any  tax  cease  to  weigh  with  their 
full  weight  in  comparison  with  a  quick  and  copious  yield  of  rev- 
enue. This  was  the  case  in  the  Civil  War,  when  it  was  not  so 
much  the  ignorance  and  inexperience  of  Congress  as  the  impera- 
tive necessity  of  obtaining  money  by  the  quickest  process,  that  was 
the  real  cause  of  many  harsh  and  unjust  provisions  in  our  financial 
legislation ;  and  the  same  thing  will  happen  again  whenever  some 
heavy  strain  is  felt  by  the  federal  Treasury.  Unless  our  system  is 
improved  by  the  addition  of  some  important  tax  which  is  capable 
of  sudden  expansion,  without  the  inconvenience  which  attends  any 
change  in  a  tax  on  commodities,  we  shall  again  see  the  govern- 
ment driven,  may  indeed  see  it  driven  in  any  year,  to  lay  some 
bad  tax  or  to  borrow,  in  order  to  bridge  over  the  gap  caused  by 
the  slow  increase  of  ordinary  taxation.  As  a  provision  for  such 
cases  of  extremity,  the  tax  on  incomes,  if  shaped  for  the  purpose, 
has  no  superior  and  no  rival ;  but  it  can  best  be  shaped  in  a  time 
of  quiet.  Maintained  at  a  low  rate  in  ordinary  times,  and  its 
methods  and  machinery  thus  perfected  and  made  familiar,  it  might 
put  in  the  hands  of  Congress  a  resource  in  case  of  need,  such  as 
has  been  sorely  missed  in  many  turns  of  our  affairs. 

How  the  income  tax  of  1894  fails  to  meet  the  necessities  either 
of  ordinary  or  of  extraordinary  occasions  may  best  be  shown  after 


I20  ESSAYS 

a  brief  recapitulation  of  its  leading  provisions.^  For  five  years, 
beginning  with  1895,  a  tax  of  two  per  cent  becomes  due  on  the  first 
day  of  July  in  each  year  on  gains,  profits,  and  incomes,  in  excess 
of  $4000,^  enjoyed  in  the  preceding  calendar  year  by  any  citizen 
of  the  United  States  or  any  person  resident  therein,  whether  de- 
rived from  property,  rents,  interest,  dividends,  or  salaries,  or  from 
any  profession,  trade,  or  employment.  The  taxable  income  is  to 
be  subject  to  the  usual  deductions  for  taxes  paid  and  losses  incurred, 
but  is  to  include  all  personal  property  acquired  by  gift  or  inherit- 
ance. As  a  basis  for  the  assessment,  every  person  of  lawful  age, 
having  a  taxable  income  of  more  than  ^3500  in  his  own  right  or 
in  any  fiduciary  capacity,  is  to  make  "a  list  or  return"  "of  the 
amount  of  his  income,  gains,  and  profits,"  under  oath,  with  heavy 
penalties  in  case  of  refusal,  neglect,  or  false  return.  All  corpora- 
tions or  associations  doing  business  for  profit  in  the  United  States, 
not  including  partnerships,  are  required  to  pay  a  tax  of  two  per  cent 
annually  on  their  net  profits  for  the  preceding  year;  and,  upon 
such  payment  being  made,  dividends  upon  their  stocks  are  not  to 
be  included  in  computing  the  income  of  their  stockholders.  On 
all  salaries  and  payments  for  services  due  from  the  United  States, 
and  in  excess  of  $4000,  the  tax  of  two  per  cent  is  to  be  withheld  by 
the  disbursing  officer. 

The  first  point  which  invites  attention  in  the  general  scheme 
of  the  new  law  is  the  singular  provision  for  including  in  the  an- 
nual gains,  profits,  and  income  to  be  taxed  the  value  of  personal 
property  received  by  gift  or  inheritance.  The  difficulty  of  making 
a  sound  distinction  between  income  and  growth  of  capital  has  al- 
ways been  recognized.  Financial  writers  have  dwelt  on  the  impor- 
tance of  maintaining  a  line  somewhere,  and  of  so  limiting  taxation 
as  not  to  impede  additions  to  the  capital  which  is  to  be  the  source 
of  future  income.  The  income  tax  of  1864  dealt  with  the  subject 
with  a  rough  hand,  and  probably  treated  as  taxable  income  much 
that  should  have  been  spared  ;  but  not  even  the  war  tax  went  to 

1  The  sections  of  the  Tariff  Act  of  1894  providing  for  the  income  tax  are  §§  27-36. 

2  The  English  law,  as  modified  by  the  legislation  of  1894,  exempts  ;{^i6o  from  all 
incomes  under  ;{^400,  and  ;i^ioo  from  all  between  ;i^400  and  ;^500.  The  Prussian  law 
now  exempts  all  income  under  900  marks,  and,  starting  from  that  point  with  a  tax  of 
6  marks,  advances  by  degrees  until  for  incomes  of  100,000  marks  and  upward  the  tax 
is  approximately  fuur  per  cent. 


THE   NEW   INCOME   TAX  121 

the  extent  of  classifying  inherited  property  as  income.  It  is  obvi- 
ous that,  in  this  capital  point  of  the  definition  of  income,  the  pres- 
ent tax  gives  up  the  idea  of  preserving  any  tenable  line.  The 
treatment  of  this  precise  point  by  the  Prussian  income-tax  law  of 
1 89 1  is  instructive.  After  defining  taxable  income  as  the  annual 
receipts  from  invested  capital,  from  real  estate,  from  trade  and 
industry,  and  from  other  sources  of  periodical  gain,  it  goes  on, 
apparently  from  abundant  caution,  to  draw  a  line  between  the 
income  and  that  which  yields  the  income  :  ^  — 

Sect.  8.  Extraordinary  receipts  from  inheritances,  gifts,  life  insurance,  from 
the  sale  of  real  property  not  undertaken  as  a  business  or  for  speculative  purposes, 
and  similar  gains,  are  not  to  be  held  as  taxable  income  but  as  an  increase  of  the 
main  capital  [Stafnmver7ndgen~\ ,  and,  like  diminutions  of  the  main  capital,  come  into 
consideration  only  so  far  as  the  yield  of  this  is  thereby  increased  or  diminished. 

The  English  income  tax,  from  its  peculiar  structure,  also  avoids 
the  confusion  which  exists  in  our  law.  It  will  be  recollected  that 
the  English  law  does  not  undertake  to  tax  the  aggregate  or  total 
income  of  the  taxpayer,  but  only  taxes  certain  specified  descrip- 
tions of  income,  —  rents,  farmers'  profits,  annuities,  interest,  and 
dividends,  gains  from  professions  and  trades,  and  salaries  of  public 
officers,  —  and  that  the  taxation  of  legacies  and  distributive  shares 
is  left,  as  it  should  be,  to  stand  as  a  part  of  the  general  system  of 
death  duties,  and  to  be  dealt  with  according  to  the  policy  govern- 
ing the  whole  subject,  and  is  not  made  an  incident  in  the  applica- 
tion of  an  entirely  different  branch  of  taxation.  It  may  be  urged 
that  the  United  States  government  no  longer  levies  duties  upon 
inheritances  and  successions,  and  that  both  Prussia  and  England 
do  levy  such  duties,  and  that  this  provision  in  the  new  income  tax 
may  thus  fill  a  hiatus  in  our  legislation,  the  presence  of  which  is 
now  sometimes  noted  with  regret.  But  it  is  to  be  remembered 
that  not  a  few  of  the  states  now  levy  such  duties,  that  more  of 
them  are  likely  to  do  so,  and  that  in  a  comprehensive  view  of  the 
whole  field  of  taxation,  therefore,  the  transmission  of  property  at 
death  did  not  require  this  attention  from  the  federal  legislator. 
If  it  did  require  such  attention,  it  may  be  added,  then  plainly  the 
succession  to  real  property  should  have  been  taxed,  as  well  as  per- 
sonal inheritances. 

1  Das  preussische  Einkommensteuergesetz  vom  24  Jiini,  1891  (Krause's  8vo  ed.), 
p.  47. 


122  ESSAYS 

The  purpose  of  the  provision  for  taxing  personal  inheritances, 
however,  is  probably  not  so  much  to  fill  a  gap  in  our  legislation  as 
to  strike  a  blow  at  large  accumulations.  The  blow  is  not  a  heavy 
one,  although  the  income  tax  of  two  per  cent  is  double  the  rate 
which  was  levied  during  the  war  upon  the  transmission  in  the 
direct  line  of  property,  real  or  personal.  Except  as  a  first  step, 
to  be  followed  in  the  future  by  some  more  serious  legislation,  this 
tax  will  probably  have  no  appreciable  effect  upon  the  great  for- 
tunes. On  the  successors  to  small  properties  the  moral  effect, 
however,  may  be  considerable.  The  man  of  relatively  small 
means,  who  finds  his  "  income  "  carried  above  the  limit  of  1^4000 
by  his  inheritance  of  a  small  property,  and  a  tax  exacted  from  him 
for  the  excess,  is  certain  to  feel  his  grievance  keenly;  and  the 
number  of  such  men  on  the  list  of  possible  taxpayers  is  vastly 
greater  than  the  number  of  inheritors  of  large  properties.  To 
such  men,  and  to  the  public  generally,  the  word  "income"  has  a 
certain  definite  meaning,  not  to  be  confused  with  capital  by  any 
eccentricity  of  a  statute ;  and  the  violence  done  to  this  understand- 
ing, when  a  so-called  "income  tax"  takes  away  a  share  of  the 
source  of  income,  is  tolerably  sure  to  leave  behind  a  sense  of 
personal  wrong,  like  that  which  can  still  be  remembered  as  among 
the  fruits  of  the  income  tax  of  the  Civil  War. 

Leaving  this  special  case  of  inheritances,  it  may  be  remarked, 
in  passing,  that  it  may  be  doubted  whether  the  same  danger  of 
doing  violence  to  an  instinctive  sense  of  the  difference  between 
income  and  capital  is  not  met  in  any  attempt  to  make  an  income 
tax  widely  inclusive  by  sweeping  phrases.  "  Gains,  profits,  or 
income  .  .  .  derived  from  any  kind  of  property,  rents,  interest, 
dividends,  or  salaries,  or  from  any  profession,  trade,  employment, 
or  vocation,  ...  or  from  any  other  sources  whatever" — is  it 
possible,  under  such  a  description  of  the  object  of  taxation  as  this, 
to  keep  to  any  such  Hne  as  that  which  the  Prussian  law,  cited 
above,  so  clearly  points  out.?  In  this  case  the  legislator  of  1894, 
like  his  predecessor  of  1864,  in  his  overweening  anxiety  lest  some 
taxable  persons  should  escape,  runs  to  the  opposite  extreme  of 
throwing  his  net  over  a  greater  number  whom  the  law  should 
properly  let  alone.  But  this  excess  of  zeal  is  not  peculiar  to 
income-tax  laws  or  to  our  national  legislation. 


THE   NEW   INCOME   TAX  123 

Coming  now  to  the  method  by  which  the  amount  of  taxable 
income,  however  described,  is  to  be  ascertained  and  brought  to  the 
knowledge  of  the  assessing  officer,  we  find  that  the  act  of  1894 
follows  the  line  laid  down  by  the  acts  passed  during  the  Civil  War, 
by  making  the  personal  declaration  of  the  taxpayer  the  basis  on 
which  the  collector  is  to  proceed,  with  the  aid  of  the  best  informa- 
tion he  can  obtain.  Nothing  could  be  simpler,  on  paper,  than  this 
method.  The  taxpayer  is  himself  the  one  person  who  knows  best 
the  amount  of  his  income  for  the  tax  year,  and  knows  best  the 
elements  from  which  it  may  be  computed  if  its  amount  is  doubtful. 
The  law  imposes  upon  him  the  duty  of  making  the  necessary  dis- 
closure for  confidential  use  by  the  public  officer ;  and  under  a  free 
government  it  is  presumed  that  the  great  mass  of  citizens  can  be 
trusted  to  perform  what  is,  after  all,  in  a  sense  a  self-imposed  duty. 
But  what  has  been  the  experience  of  the  several  states  in  assessing 
by  the  same  method  the  general  property  taxes,  which  have  been 
so  familiar  a  part  of  our  local  taxation  throughout  this  century,  and 
in  some  states  for  a  still  longer  period .-'  We  have  had  painful 
evidence  of  the  truth  of  Leroy-Beaulieu's  extremely  cautious  obser- 
vation that  "  nulle  soci^te  humaine  n'est  composee  en  totalite 
d'hommes  d'une  inflexible  probite."  In  an  earlier  generation  and 
in  a  simpler  community,  where  every  man's  affairs  were  tolerably 
well  known  to  his  neighbors,  and  probably  differed  little  in  kind 
from  those  of  his  neighbors,  and  when  the  opportunities  for  invest- 
ment were  comparatively  few,  and  chiefly  of  such  kinds  as  to  be 
well  open  to  observation,  the  process  of  self-assessment  by  declara- 
tion in  some  form  to  assessing  officers  may  have  answered  its  pur- 
pose ;  although,  even  in  this  case,  the  chief  safeguard  was  probably 
the  notoriety  of  essential  facts  rather  than  the  individual  sense  of 
duty  among  our  predecessors,  strong  as  that  may  have  been.  But 
with  the  growth  of  wealth  and  the  change  in  social  conditions  there 
has  been  substituted  for  this  primitive  state  of  things,  over  a  large 
part  of  our  country,  an  organization  of  astonishing  complexity,  in 
which  the  affairs  of  the  individual  are  known  to  others  little  beyond 
the  point  which  he  may  choose ;  and  his  opportunities  for  the 
unobserved  investment  of  capital  may  almost  be  said  to  be  infinite. 
State  legislation  has  often  attempted  to  support  the  flagging  con- 
science of  taxpayers  by  increased  stringency,  until  in  some  cases 
the  laws  prescribing  the  form  of  declaration,  and  seeking  to  probe 


124  ESSAYS 

to  its  depths  the  knowledge  of  the  declarant,  are  miracles  of 
ingenuity.  And  yet  there  is  probably  no  state  in  which  the 
attempt  to  tax  personal  property,  upon  a  list  made  out  by  the 
taxpayer  under  the  requirements  of  the  law,  any  longer  succeeds. 
In  the  emphatic  words  of  a  board  of  commissioners  in  a  state 
which  has  been  said  to  bear  the  palm  for  the  minuteness  and 
scope  of  its  inquisition,  so  far  as  the  statute  is  concerned,  "  fully 
one-half  of  the  property  of  a  modern  state  exists  in  intangible 
forms :  of  this  all  but  a  mere  bagatelle  escapes  taxation  entirely, 
when  the  attempt  is  made  to  reach  it  in  the  form  of  property."  ^ 
The  inabihty  of  the  law  to  reach  that  which  is  known  to  the  tax- 
payer alone  is  everywhere  notorious,  and  shows  itself  in  such 
absurd  results  as  the  apparent  decline  of  personal  property  in 
highly  prosperous  communities.  After  long  and  obstinate  efforts 
to  enforce  it,  the  taxation  of  intangible  property  has  failed  even  in 
states  like  Massachusetts,  where  the  machinery  for  its  enforce- 
ment has  been  as  carefully  perfected  as  anywhere,  and  has  found 
constant  support  in  the  robust  faith  of  legislators  and  administra- 
tive officers. 

The  difficulties  in  the  way  of  assessing  an  income  tax  upon 
declarations  made  by  the  taxpayers  appear  to  the  writer  to  be 
completely  analogous  to  those  which  defeat  the  taxation  of  per- 
sonal property.  The  sources  of  a  large  part  of  the  current  income 
of  individuals  are  the  very  classes  of  intangible  property  which 
constantly  elude  assessment.  The  dependence  for  the  disclosure 
of  income  in  general  is  on  the  same  average  degree  of  honest 
compliance  with  law,  which  has  hitherto  proved  insufficient  for 
the  success  of  state  taxation  in  pari  materia.  What  reason  is 
there  for  expecting  any  better  result  under  the  act  of  1894  than 
has  been  secured  under  a  multitude  of  state  laws  .-• 

It  is  probable  that  reliance  is  placed  on  the  power  of  the 
United  States  government  to  enforce  its  will  where  a  single  state 
fails ;  and,  in  dealing  with  some  classes  of  evils,  the  superiority  of 
the  central  power  and  its  freedom  from  the  influences  which  some- 
times hamper  local  authority  is  undeniable.  It  is  sometimes  of 
unspeakable  importance  that  a  power  not  affected  by  the  passion 
or  ruling  interests  of  a  narrow  community  should  come  in,  with  its 
irresistible  strength,  to  enforce  the  laws  made  for  the  benefit  of 

1  Report  of  the  Tax  Commission  of  Ohio,  1893,  p.  42. 


THE    NEW    INCOME   TAX  I25 

the  whole,  and  to  protect  the  general  interests  of  the  nation.  But 
the  present  case  is  not  analogous  to  the  suppression  of  a  riot 
which  has  become  too  strong  for  a  state  government  to  deal  with, 
or  to  a  case  of  threatened  interruption  of  the  mails  or  of  interstate 
commerce.  This  is  a  case  of  widely  prevailing  inability  to  meet  a 
certain  strain  upon  the  conscience,  and  is  not  to  be  met  by  march- 
ing in  troops,  and  is  not  at  all  affected  by  the  circumstance  that 
certain  public  officers  receive  their  orders  from  Washington,  and  not 
from  a  state  capital.  The  federal  power,  after  all,  can  act  in  this 
matter  only  by  making  its  rules  stringent  and  its  penalties  severe. 
It  must  proceed,  that  is  to  say,  in  the  same  direction  in  which  the 
state  governments  have  been  moving;  and,  if  it  is  expected  to 
advance  farther  than  they,  this  can  be  only  because  it  is  supposed 
that  its  measures  will  be  more  severe  or  more  strictly  enforced. 
But  what  power,  federal  or  other,  can  by  sheer  severity  carry 
through  successfully  a  system  which  demands  from  the  individual 
conscience  more  than  is  required  by  the  general  moral  sense  of  the 
community .''  Increased  severity  in  such  a  case  must  inevitably  be 
met  by  increased  ingenuity,  and  this  all  the  more  certainly  if  the 
severity  is  practised  under  an  authority  which  is  felt  to  be  in 
any  degree  external  and  remote.  Not  much  can  be  argued  in  the 
present  case  from  the  measure  of  success  attained  in  the  enforce- 
ment of  the  income  tax  of  the  Civil  War  and  for  a  few  years  after. 
The  United  States  government  was  then  supported  by  a  vast 
current  of  popular  feeling,  which  for  a  time  was  ready  to  treat 
any  attempt  to  evade  public  dues  in  the  hour  of  calamity  as  a 
species  of  treason ;  and  yet  it  would  still  be  easy  to  collect  the 
evidence  of  the  increasing  difficulty  which  was  experienced  in 
finding  the  incomes  to  be  taxed,  after  the  danger  had  passed  and 
the  enthusiasm  of  the  time  had  begun  to  cool.  With  no  great 
tide  of  sentiment  now  existing  in  support  of  unusual  federal  taxa- 
tion,i  there  appears  to  be  no  ground  for  believing  that  the  act  of 
1894  will  be  able  to  secure  the  full  disclosure  at  which  it  aims. 
Doubtless  large  sums  will  be  collected  under  it,  for  the  field  to 
be  reaped  is  wide  and  rich.  But  it  is  altogether  improbable  that 
the  assessment  will  approach  completeness  or  uniformity,  or  that 
the  administration  of  the  tax  by  the  United  States  will  escape  the 

^  See    Dr.  J.  A.   Hill's  estimates,    Qiiartei-ly  Journal  of  Economics,  July,    1894, 
PP-  445-448. 


126  ESSAYS 

progressive  demoralization  which  takes  place  when  conscientious 
taxpayers  find  that  others  are  shirking  the  burden  which  was 
intended  for  all. 

No  doubt  the  acknowledgment  that  the  taxpayer's  declaration 
is  an  unsafe  basis  for  the  assessment,  even  when  corrected  by  the 
best  information  at  the  command  of  the  assessor,  would  make  the 
framing  of  an  income  tax  for  this  country  far  more  difficult.  It 
would  be  necessary,  in  all  probability,  to  abandon  the  fiction  on 
which  our  law  proceeds,  — that  every  person  having  taxable  income 
pays  to  the  government  a  fixed  proportion  of  it,  to  be  mathemati- 
cally ascertained  by  a  uniform  rule.  In  place  of  this  theoretical 
perfection  of  system,  we  should  have  to  substitute  provisions  for 
collecting  the  tax  in  all  possible  cases  from  the  source  of  the  in- 
come instead  of  its  recipient,  and  this  with  a  frank  recognition  of 
the  fact  that  such  a  method  could  only  give  us  an  approximation 
to  equality.  It  would,  however,  give  us  in  all  probability  as  close 
an  approximation  as  the  present  condition  of  our  part  of  the  world 
will  allow,  which  is,  in  fact,  all  that  can  be  secured  in  practice 
under  any  system,  however  rigid  and  precise  we  may  make  the 
letter  of  the  law. 

The  obvious  advantage  to  be  gained  by  taxing  income  at  its 
source,  beyond  the  mere  convenience  of  collecting  the  tax  in  rela- 
tively large  amounts,  is  that  the  assessment  is  made  in  the  quarter 
where  there  is  the  least  temptation  to  concealment.  The  com- 
panies or  persons  paying  the  rent,  interest,  or  dividends  which  are 
to  be  taxed,  independently  of  their  openness  to  inspection,  are  not 
actuated  by  the  same  motives  as  the  individual  who  is  called  upon 
to  return  the  amount  of  his  income.  It  is  with  a  wise  perception 
of  the  motives  at  work  that  the  English  income-tax  law  provides 
for  the  taxation,  not  of  total  income,  but  of  five  distinct  classes  of 
income,  described  under  the  schedules  A,  B,  C,  D,  and  E.  The 
schedules  are  broad,  and  cover  the  ground  fairly  well,  no  doubt ; 
but,  if  they  do  not,  the  law  does  not  concern  itself  with  a  failure  on 
a  small  scale.  The  great  object  is  to  narrow  the  field  within  which 
individual  declarations  must  be  relied  on ;  and  this  is  accomplished 
by  providing  that  under  schedule  A  (rent),  C  (public  funds),  and 
E  (public  offices),  the  tax  shall  be  collected  at  the  source  of  the 
income,  and  not  from  the  person  who  enjoys  it ;  that,  under  sched- 
ule B  (farmers'  profits),  the  tax  shall  be  assessed  on  an  estimated 


THE   NEW   INCOME   TAX  12/ 

profit  equal  to  one-half  of  the  rent  paid ;  and  that  a  declaration 
shall  be  required  only  under  schedule  D  for  income  from  trades 
and  professions.  In  short,  the  source  of  the  income  is  aimed  at  by 
the  English  law,  wherever  the  nature  of  the  case  permits ;  and  the 
resort  to  declarations,  recognized  as  hazardous,  is  restricted  to  less 
than  one-half  of  the  total  actual  assessment.  This  system  is 
entirely  at  variance  with  the  current  notion  of  an  income  tax ;  for 
under  it  the  income,  as  a  whole,  is  not  brought  into  view,  and  the 
tax  is  laid,  not  on  the  income  as  such,  but  on  several  probable  chief 
constituents  of  the  income.  But,  after  all,  the  practical  question 
must  be  whether  the  tax  is  more  thoroughly  collected  under  one 
system  or  the  other.  On  this  point  the  remarkable  regularity  of 
receipts  from  the  English  tax^  and  the  close  correspondence 
between  estimated  and  actual  receipts  is  strong  evidence  of  suc- 
cessful administration,  and  raises  a  presumption  in  favor  of  the 
adoption  of  a  similar  method  even  under  the  different  conditions 
presented  in  this  country. 

It  is  true  that,  by  the  Prussian  law  of  1891,  the  declaration  is 
now  made  the  basis  of  assessment  of  the  income  tax  in  that  country. 
The  people  of  Prussia  have  had  a  long  course  of  education  under 
the  various  forms  assumed  by  the  class  and  income  tax  since  1820.^ 
At  long  intervals  the  law  has  been  strengthened  until,  from  a  rough 
classification  of  the  taxpayers  by  merely  external  signs,  it  has  ad- 
vanced to  its  present  demand  that  the  taxpayer  shall  show  that 
his  income  falls  between  certain  rather  close  limits.  But  the  Prus- 
sian declaration,  made  under  affirmation,  and  "  to  the  best  of  his 
knowledge  and  belief,"  is  a  simple  document  compared  with  that 

1  For  the  last  ten  years  the  receipts  from  income  tax,  as  estimated  by  the  Chancellor 
of  the  Exchequer  at  the  beginning  of  each  fiscal  year  and  as  reported  at  the  close,  have 
been  as  follows,  stated  in  millions  and  hundredths  of  millions  :  — 


Estimated 

Actual 

Estimated 

Actual 

1884-1885    . 

11.25 

12. 

I889-I89O        . 

•      12.55 

12.77 

I885-I886    . 

15.40 

15.16 

189O-189I 

.      13.20 

13-25 

I 886- I 887      . 

1575 

15.90 

I  891-1892 

•     13-75 

13.81 

1887-1888      . 

14-34 

14.44 

1892-1893        . 

•     13-40 

13-47 

1888-1889      . 

T7 :_  i.1.-    

12.25 

12.70 
_    .00.     .00 

1893-1894        . 

•     15-15 

15.20 
.  ii 

Even  in  the  exceptional  year  1884-1885  the  actual  receipts  varied  less  than  7  per 
cent  from  the  estimates. 

2  See  Qtiarterly  Journal  of  Economics,  January,  1892,  p.  207,  for  an  article  on  this 
subject  by  Dr.  J.  A.  Hill. 


128  ESSAYS 

which  formerly  confronted  the  American  taxpayer,  or  that  which 
is  contemplated  by  the  recent  act ;  and  it  is  likely  to  have  a  much 
less  important  place  in  the  business  of  assessment.  It  calls  only 
for  general  statements  of  the  distribution  of  the  taxpayer's  income 
under  the  four  heads  referred  to  on  page  121,  and  leaves  to  the 
chairman  of  every  board  of  assessment  a  wide  discretion  as  to  the 
extent  to  which  he  shall  carry  further  inquiry.^  The  Prussian  dec- 
laration, in  short,  appears  to  be  a  rather  cautious  tentative  advance 
from  a  system  of  extreme  laxity,  —  an  experiment  of  which  the 
success  has  not  yet  been  tested  by  sufficient  practice  to  make  it 
significant  for  the  United  States. 

It  may  appear  at  first  sight  that  the  act  of  1894  makes  some 
concession  to  the  method  of  taxation  at  the  source,  by  the  pro- 
vision that  all  corporations  doing  business  for  a  profit,  including 
banks,  insurance,  railway,  and  telegraph  companies,  shall  pay  a 
tax  of  two  per  cent  on  their  annual  net  profits  ;  and  that  dividends 
thus  taxed  at  the  source  shall  not  be  included  in  the  taxable  in- 
come of  the  stockholder.  Whether  this  provision  was  adopted  for 
any  other  reason  than  the  increased  facility  of  collection,  especially 
from  non-residents,  and  the  occasion  which  it  supplies  for  requir- 
ing from  all  corporations  a  statement  of  accounts,  may  well  be 
doubted.  At  all  events,  the  provision  acts,  for  the  most  part,  not 
as  a  substitute  for  the  declaration,  but  as  an  auxiliary ;  for  the  tax- 
payer, except  in  cases  where  his  income  from  other  sources  than 
dividends  is  not  more  than  $3500,  must  still  make  his  declaration 
in  due  form.  It  is  clear,  then,  that  the  act  does  not  tax  this  species 
of  income  at  its  source  as  the  means  of  exempting  any  consider- 
able number  of  persons  from  the  duty  of  making  the  usual  decla- 
ration. Apparently,  in  the  mind  of  the  legislator,  the  collection 
of  a  tax  at  its  source  and  the  declaration  by  the  taxpayer  are 
things  altogether  dissociated. 

In  some  other  particulars,  also,  the  treatment  of  the  question 
of  payment  by  corporations  in  the  new  act  is  hard  of  explanation. 
It  would  seem,  for  example,  that  there  would  be  the  same  reasons 

1  The  administrative  instructions,  published  by  the  Minister  of  Finance,  require,  in 
article  55,  that  the  chairman  shall  see  that  the  assessment  is  not  negligently  made  upon 
incorrect  declaration,  and  then  add  the  caution,  —  "  Andrerscits  sind  kleinliche  Erorter- 
ungen  ut)er  geringfugige  I'unkte  und  jede  nicht  zur  Erreichung  des  Zweckes  gebotene 
Belastigung  der  Steucrpflichtigen  zu  vermeiden."  See  Das  preussische  Einkomrnen- 
steuergesetz,  p.  204  of  Krause's  8vo  edition. 


THE   NEW    INCOME   TAX  129 

of  convenience  and  security  for  collecting  from  corporations  the 
tax  on  their  payments  of  interest,  as  for  collecting  from  them  the 
tax  on  dividends.  The  former  income-tax  law,  which  cared  little 
about  the  question  of  method,  but  cared  much  for  speedy,  certain, 
and  large  collections,  provided  that  the  income  tax  upon  interest 
or  coupons  should  be  detained  by  all  corporations,  as  well  as  the 
tax  on  dividends  or  other  profits,  and  should  be  paid  over  in  like 
manner  to  the  United  States.^  This  was  a  most  judicious  and  use- 
ful provision,  and  would  seem  to  be  strongly  suggestive  under 
present  circumstances.  It  is  obvious  that  an  enormous  mass  of 
incomes  from  investments  would  now  be  covered  by  a  similar  pro- 
vision, and  also  that  the  income  from  coupon  bonds,  as  to  the 
ownership  of  which  no  record  exists,  is  the  most  slippery  income 
of  all,  and  the  most  easily  concealed  by  the  reluctant  taxpayer. 
Still,  the  income  from  bonds  and  other  interest  on  debts  —  so 
easily  taxed  at  its  source  —  is  left  by  the  new  act  to  stand  upon 
the  taxpayer's  declaration  alone.  Another  point  somewhat  diffi- 
cult of  explanation  is  the  fact  that,  while  the  act  of  1894  professes 
to  establish  an  exemption  of  $4000,  nevertheless  persons  whose 
incomes  are  within  that  line  are  to  be  subject  to  an  income  tax  on 
so  much  income  as  they  may  derive  from  dividends.  The  corpo- 
ration paying  the  tax  levied  on  its  net  income  evidently  pays,  and 
is  intended  by  the  act  to  pay,  an  income  tax  for  every  stockholder 
whose  dividend  is  thereby  diminished,  whether  he  is  a  millionnaire 
or  a  poor  man.  It  is  clear  that  the  stockholder  in  such  a  case  re- 
mains subject  to  the  tax,  unless  some  provision  is  made  for  refund- 
ing to  him  the  amount  paid  on  his  account.  Under  the  English 
law,  where  dividends  or  interest  have  thus  been  taxed  at  the 
source,  any  stockholder  or  creditor  entitled  to  exemption  from  in- 
come tax  can  obtain  repayment  of  the  tax  thus  unduly  exacted 
from  him,  by  making  application  in  the  proper  place  and  form. 
But  no  provision  of  this  sort  is  made  in  the  new  act  of  Congress ; 
and  a  person  supposed  to  be  exempt  from  taxation  under  the  law 
may,  in  fact,  be  subject  to  taxation  on  his  whole  income  if,  as 
sometimes  happens,  he  receives  it  all  from  dividends.  No  doubt 
the  machinery  for  making  a  rebate  to  small  incomes  in  such  cases 
would  have  to  be  elaborate,  and  would  be  difficult  to  manage  — 
more  difficult,  perhaps,  in  this  country  than  in  one  so  compact  and 

1  Internal  Revenue  Act  of  1864,  §  122. 
K 


130  ESSAYS 

homogeneous  as  England.  This,  however,  is  a  part  of  the  prob- 
lem of  taxation  of  income  at  the  source  that  has  to  be  faced 
squarely  in  even  a  partial  treatment  of  the  subject ;  and  it  is  not 
creditable  to  our  legislation  that  it  should  have  been  satisfied  with 
the  absurd  result  just  pointed  out. 

It  is  hardly  possible  that  the  renewed  resort  to  taxation  upon 
declaration,  under  a  law  of  the  United  States,  should  not  have 
some  effec:  on  the  current  of  opinion  which  has  been  so  long 
gathering  in  opposition  to  the  analogous  practice  of  state  taxation 
of  personal  property.  The  wide  recognition  of  the  failure  of  the 
local  practice  has  already  been  referred  to.  There  has  been  for 
some  years  past  an  increasing  disposition  in  many  States  to  find 
some  substitute  for  this  ineffective  and  obsolete  system.  What 
will  be  the  effect  of  the  adoption  by  the  United  States  of  the  same 
practice  of  grasping  at  the  intangible .''  Will  it  encourage  or  dis- 
hearten the  movement  for  local  reform,  or  will  the  movement  pause 
until  the  issue  of  the  new  experiment  is  seen  ?  We  shall  be  fortu- 
nate if  it  proves  that  the  United  States  have  not  interposed  some 
serious  delay  in  the  progress  of  a  change,  not  likely  to  be  too  rapid 
at  the  best. 

The  only  remaining  feature  of  the  act  of  1894  which  we  have 
to  consider  is  the  provision  by  which  the  tax  is,  for  the  most  part, 
to  be  levied  annually  on  the  income,  not  of  the  current  year,  but  of 
the  year  preceding.  This  is  a  natural,  although  not  a  necessary, 
apphcation  of  the  system  of  levying  upon  declared  income.  In 
theory  the  accounts  of  the  taxpayer  for  a  year  are  made  up  and 
closed.  He  knows  to  a  penny  what  his  income  was ;  and  it  is 
the  simplest  of  financial  operations  to  calculate  two  per  cent  of  the 
amount,  and  in  due  time  to  pay  down  this  tax.  So  long,  indeed, 
as  the  law  proceeds  on  the  theory  of  an  exact  determination  of  the 
income  to  be  taxed,  it  is  hard  to  see  how  anything  but  the  income 
of  a  finished  year  can  be  dealt  with.  And  yet  it  is  probably  more 
convenient  for  the  taxpayer  that  his  tax  should  come  as  a  deduc- 
tion made  at  the  time,  from  the  income  on  which  it  is  actually 
assessed,  and  not  as  a  payment  to  be  made  from  the  income  of 
another  year,  which  is  perhaps  less  prosperous. 

The  English  income  tax,  being  levied  at  the  source  whenever 
possible,  is  almost  necessarily  a  tax  on  current  income.     The  rate 


THE   NEW   INCOME   TAX  13I 

fixed  by  the  important  Finance  Act  of  July  31,  1894,  for  example, 
is  to  be  levied  on  incomes  of  the  year  beginning  April  6,  1894, 
except  in  the  cases  where,  for  convenience  of  approximation,  the 
average  income  of  two  or  three  years  is  taken  as  the  basis.  Even 
the  Prussian  law  of  1891,  which  follows  in  moderation  the  plan  of 
levying  upon  declaration,  calls  upon  the  taxpayer  to  declare  what 
his  income  is  for  the  current  tax  year  in  which  the  payment  is  to 
be  made.i  The  provisions  made,  however,  by  the  law  of  the  United 
States  on  this  point  are  whimsical  in  the  extreme.  The  tax  on 
income  derived  from  dividends  and  other  profits,  as  well  as  the 
neglected  case  of  coupons,  naturally  suggests  the  collection  of 
income  tax  at  the  moment  when  the  income  accrues  and  passes  to 
the  stockholder  or  creditor ;  but  the  law  throws  away  this  oppor- 
tunity by  postponing  the  levy  upon  the  corporation  until  the  first 
half  of  the  next  year,  when  the  accounts  of  the  calendar  year  for 
which  the  tax  is  laid  shall  have  been  completely  made  up.  But 
for  all  persons  in  the  service  of  the  United  States  the  income  tax 
on  the  excess  of  salaries  above  ^4000  is  to  be  withheld  from  the 
salary  when  paid,  so  that  for  this  class  of  persons  and  to  this 
extent  the  tax  is  laid  upon  the  income  of  the  current  year,  and  not 
of  that  preceding.2 

The  method  of  taxing  income  in  the  year  in  which  it  accrues, 
especially  if  accompanied  by  the  practice  of  stopping  the  tax  at 
the  source  of  the  income  wherever  possible,  brings  into  view  some 
possible  conveniences  in  administration  which  are  lost  by  the 
method  so  familiar  in  this  country.  Taxes  on  accruing  dividends 
and  interest,  paid  by  the  debtor,  must  of  necessity  be  pretty  well 
distributed  over  the  fiscal  year,  offering  some  advantages  to  the 
Treasury  not  to  be  secured  from  a  tax  of  which  the  greatest  part 

^  This  is  easily  done  of  course  with  all  fixed  incomes  from  investments.  Variable 
and  business  incomes  are  to  be  returned  at  the  average  of  the  last  three  years.  See  §  10 
of  the  law  of  1 891. 

2  It  was  the  intention  at  one  stage  of  the  bill  to  extend  the  provision  for  the  deduc- 
tion of  the  tax  from  salaries,  so  as  to  require  some  employers  besides  the  United  States 
to  withhold  the  tax  on  any  excess  of  salaries  over  ^^4000,  and  to  pay  it  to  the  proper 
collecting  officer  ;  and  §  28  contains  two  references  to  "  that  portion  of  any  salary  upon 
which  the  employer  is  required  bylaw  to  withhold,  and  does  withhold,  the  tax."  In  the 
final  draft  of  the  act,  however,  as  printed  at  Washington  for  public  use,  the  provision  for 
the  payment  of  the  tax  by  other  employers  than  the  United  States  does  not  appear,  so 
that  these  two  references  are  without  meaning,  except  as  evidence  of  the  haste  and  con- 
fusion in  which  this  important  measure  was  carried  through. 


132  ESSAYS 

falls  due  at  a  single  epoch.  Collected  at  the  natural  dividend 
periods  such  taxes  come  in  by  instalments,  to  the  considerable 
relief  of  the  company  or  person  making  the  payment.  It  is  then 
a  natural  and  easy  step  to  provisions,  found  both  in  the  English 
and  the  Prussian  systems,  for  the  payment  by  instalments  in  some 
other  cases,  when  circumstances  make  this  method  convenient. 
Probably  for  a  large  part  of  the  community  the  option  of  paying 
such  a  tax  by  quarterly  payments,  which  is  the  general  rule  under 
the  Prussian  law,  instead  of  the  lump  sum  to  which  we  are  accus- 
tomed here,  would  make  the  collection  a  far  less  formidable  pro- 
ceeding than  it  must  now  appear  as  the  day  of  reckoning  draws  on. 
But  beyond  this  there  is  another  point  at  which  the  whole  rela- 
tion of  the  taxpayer  to  the  tax  is  altered,  when  the  income  is  taxed 
by  instalments  in  the  year  in  which  it  accrues.  The  law  of  the 
United  States  allows  the  deduction  from  income  of  "losses  actually 
sustained  during  the  year"  ;  but  there  can  be  no  deduction  for  mis- 
fortune incurred  in  the  year  when  the  tax  falls  due.  There  is  a 
complete  separation  between  the  conditions  under  which  the  liability 
for  the  tax  accrues  and  those  under  which  the  payment  must  be 
made.  But,  where  the  tax  is  levied  upon  current  income,  it  is 
brought  into  close  correspondence  with  the  actual  ability  of  the 
taxpayer.  It  then  becomes  possible  to  provide,  in  some  cases,  for 
an  increase  of  the  tax  where  new  sources  of  income  are  opened  to 
the  taxpayer  within  the  year,  and  in  some  to  lighten  the  tax  where 
misfortune  has  diminished  his  income  since  the  assessment  for  the 
year  was  made.^  The  tax  then  loses  some  of  its  harshness,  and 
something  of  its  present  aspect  of  an  arbitrary  levy,  and  takes  its 
place  as  a  natural  and  speedy  result  of  the  good  or  bad  fortune  of 
the  year  in  which  it  is  due. 

It  is  not  worth  while,  however,  to  go  farther  in  urging  this  or 
that  point  in  which  the  method  of  levying  an  income  tax  in  this 
country  is  defective.  The  law  of  1894  marks  no  advance  in  this 
difficult  branch  of  taxation.  The  whole  subject  is  one  in  regard 
to  which  our  legislators,  national  and  local,  are  bound  in  a  singular 
degree  by  habit  and  precedent.  A  practice  once  adopted  becomes 
fixed,  an  old  method  is  good  and  a  new  one  is  visionary,  and  the 
appeal  to  the  experience  of  other  countries  is   pronounced  un- 

1  See  the  cases  provided  for  in  §§  57,  58,  of  the  Prussian  law. 


THE   NEW   INCOME   TAX 


133 


American.  The  framers  of  the  new  law  have  made  no  excep- 
tional mistake  in  resolutely  shutting  their  eyes  to  what  may  be 
learned  elsewhere  on  this  subject.  They  have  taken  the  course 
which  might  easily  have  been  predicted,  in  going  to  the  legislation 
of  the  Civil  War^  for  the  model  to  be  followed  at  the  present  time  ; 
but  they  have  followed  that  model  without  thought  or  discrimina- 
tion, and  without  the  defence  of  overwhelming  necessity  which 
could  be  made  for  their  predecessors  thirty  years  ago. 

Postscript  ^ 

The  collapse  of  the  income  tax  of  1894,  under  the  decision^  of 
the  Supreme  Court  of  the  United  States,  has  probably  caused 
more  surprise  than  grief.  Nothing  could  disguise  the  fact  that, 
considered  as  a  financial  measure,  the  tax  was  hastily  and  clumsily 
arranged,  and  that  its  provisions  defied  the  teachings  both  of 
equity  and  of  experience.  It  offended,  as  a  piece  of  class  legis- 
lation on  the  one  hand,  and  by  its  weakness  failed  to  satisfy  those 
who  demanded  such  legislation  on  the  other  hand.  Such  strength 
as  it  had  with  the  public  was  in  a  considerable  degree  sectional, 
and  deepened  the  distrust  of  many  who  might  have  been  wilHng 
to  see  incomes  taxed  under  more  favorable  conditions. 

But  that  the  tax  should  disappear  by  reason  of  a  construction 
of  the  Constitution,  which  practically  forbids  the  levy  of  a  national 
income  tax,  is  an  event  likely  to  cause  regret,  which  will  strengthen 
with  time  and  reflection.  A  most  valuable  financial  resource  is  thus 
lost,  for  which  there  is  no  available  substitute  —  a  resource  specially 
adapted  for  use  in  emergencies  and  at  times  when,  as  in  the  Civil 
War,  indirect  taxation  is  strained  as  far  as  it  will  bear.  The  decision 
of  the  court  that  "direct  taxes,"  in  the  language  of  the  Constitu- 
tion, is  a  phrase  of  wider  meaning  than  had  been  held  in  previous 
adjudications,  must  be  accepted.  But  it  follows  that,  in  one  impor- 
tant respect,  the  government  established  by  the  Constitution  is 
not  so  strong  as  it  had  been  supposed  to  be,  and  probably  not  so 
strong  as  the  majority  of  our  people  would  desire  to  have  it. 

1  For  a  careful  study  of  the  income-tax  legislation  of  the  Civil  War  and  the  opera- 
tions under  it,  see  Dr.  J.  A.  Hill's  article,  "The  Civil  War  Income  Tax,"  Quarterly 
Journal  of  Economics,   1894,  p.  416. 

2  Quarterly  Journal  of  Ecoftomics,  July,  1895. 

3  Pollock  V.  Farmers  Loan  and  Trust  Company,  137  United  States,  429,  and 
158  idem,  601. 


134  ESSAYS 

It  must  be  added  that  the  fact  that  the  decision  of  the  court 
in  this  case  was  the  decision  of  a  bare  majority  is  not  the  least 
disagreeable  circumstance  of  the  case.  The  possibihty  that  the 
adjudication  which  thus  reversed  a  previous  line  of  decisions  may 
itself  be  reversed  hereafter  upon  some  slight  change  in  the  com- 
position of  the  court  is  the  subject  of  general  comment,  and  must 
certainly  cause  much  uneasy  reflection  in  the  minds  of  those  who 
value  the  stability  and  dignity  of  our  judicial  institutions. 

From  every  point  of  view,  then,  the  attempt  to  revive  the 
income  tax  by  the  act  of  1894  promises  to  stand  hereafter  as  a 
conspicuous  example  of  the  danger  of  playing  with  edge-tools. 


EARLY   BANKING   SCHEMES   IN    ENGLAND i 

The  establishment  of  the  Bank  of  England  in  1694,  and  the 
abortive  Land  Bank  of  1696,  were  the  results  of  a  discussion 
which  had  left  its  traces  in  projects  and  pamphlets  scattered  over 
a  century.  The  following  notes  of  a  series  of  banking  schemes 
will  show  how  the  EngUsh  mind  was  long  attracted  on  the  one 
hand  by  the  successful  operation  of  deposit  banking  in  Venice  and 
Amsterdam,  and  on  the  other  by  the  hope  of  devising  some  means 
for  using  landed  security  as  the  basis  of  banking  credit 

In  Price's  "  Handbook  of  London  Bankers  "  (p.  142)  is  given 
in  full  the  petition  of  Christopher  Hagenbuck  and  his  partners  in 
November,  1581,^  representing  that  he  has  found  a  way  to  institute 
an  office  into  which  much  money  shall  enter  every  year  without 
expense,  so  that  her  Majesty  can  have  the  use  of  any  needful 
sum,  the  country  be  kept  in  abundance,  and  usury  stopped.  The 
petitioner  proposes  to  explain  his  plan  on  condition  that  he  shall 
have  for  twenty  years  six  per  cent  on  the  gross  sum  received  by 
the  office.  The  queen  agreed  to  allow  four  per  cent  by  a  grant 
under  the  Great  Seal,  but  nothing  further  appears  to  have  been 
done. 

Hagenbuck's  petition  is  in  Italian,  and  he  is  himself  spoken  of 
as  "  an  Italian  "  (p.  147).  The  petition  is  dated  just  three  years 
prior  to  the  decree  of  the  Venetian  Senate  establishing  the  "  Banco 
della  Piazza  de  Rialto,"  at  a  time  when  private  banking  had  shown 
its  advantages  and  its  dangers,  and  when  the  debate  as  to  the 
substitution  of  a  public  bank  had  probably  begun  in  Venice.  It 
is  not  unlikely,  then,  that  Hagenbuck  proposed  to  import  into 
England  an  idea  which  had  become  familiar  to  him  from  Venetian 
experience. 

^  Quarterly  Journal  of  Economics,  July,  i888. 

2  This  is  entered  by  title  in  Calendar  of  State  Papers,  Domestic,  1581-1590, 
P-3"- 

135 


136  ESSAYS 

Price  also  gives  ("  Handbook,"  p.  145)  a  series  of  papers  under 
date  of  May,  1622,^  in  which  it  is  proposed  that  a  bank  should  be 
established,  under  the  charge  of  a  commission  of  merchants,  where 
the  king  should  receive  and  make  his  payments,  and  merchants  be 
invited  to  leave  their  money,  and  where  "  all  payments  of  20/.  and 
above  shall  be  made,  and  only  an  entry  made  ther  of  the  payment." 

They  which  receave  ther  mony  at  the  Bank  shal  be  at  ther  owne  libertye, 
eath''  to  carry  it  away,  or  to  leave  it  ther  for  the  owne  use  at  ther  need :  If  they 
leave  it  ther  they  shall  by  way  of  assignation  pay  it  over,  only  by  entring  it  in  the 
Bank,  which  shall  goe  as  an  actuall  payment,  &  soe  a  100/  may  be  assigned  fro 
man  to  man  to  serve  for  payment  of  tenn  severall  loodred  or  more.  .  .  . 

The  examples  of  oth''  states  might  teach  us  the  use  of  this  Bank,  especially  of 
the  Venetians  &  other  places  in  Italye. 

Other  references  are  made  in  these  papers  to  the  example  of 
Venice.  No  action  appears  to  have  been  taken  on  the  scheme 
of  1622. 

Under  the  commonwealth,  W.  Potter  published  :  — 

"  The  Key  to  Wealth."     Folio.  84  pp. 
"The  Tradesman's  Jewell."     .Small  4to,  16  pp. 

"  Essay  upon  a  Bank  of  Lands  to  be  erected  throughout  the  commonwealth." 
Small  4to,  6  pp. 

"Humble  Proposals."     Small  4to,  16  pp.     165 1.^ 

The  "  Key  to  Wealth  "  is  a  prolix  discussion,  of  which  the  effect 
is  seen  in  the  proposition  (p.  14)  "that  an  encrease  of  money  can- 
not possibly  occasion  an  encrease  in  the  price  of  commodities  (or 
any  other  Inconveniences)  but  by  increasing  the  sale  of  Com- 
modities." Anything  else,  the  author  argues  (p.  38),  which  would 
give  as  good  security  for  obtaining  commodities  at  pleasure,  would 
be  as  good  as  money;  and  so  (p.  45)  bills  might  be  issued  by  a 
company  of  tradesmen  by  consent,  who  should  bind  themselves 
each  to  the  other  to  receive  and  make  the  bills  good.  The 
"  Tradesman's  Jewell "  suggests  that  the  bills  should  be  paid  within 

^  These  papers,  numbered  29,  30,  31,  and  32,  are  described  in  Calendar  of  State 
Papers,  Domestic,  1619-1623,  p.  386,  where  Nos.  29,  30,  and  32  are  said  to  be  by  Sir 
Rcbe-t  Heath,  then  Solicitor-General. 

"  My  note  of  the  full  titles  of  Potter's  pamphlets  is  mislaid.  For  the  "Tradesman's 
Jewell,"  see  McCuUoch's  "Literature  of  Political  Economy,"  p.  159.  The  "Key  to 
Wealth"  and  "Tradesman's  Jewell"  are  both  referred  to  in  the  "  Ilumljle  Proposals," 
and  are  therefore  as  early  as  1651. 


EARLY    BANKING   SCHEMES   IN   ENGLAND  137 

six  months  after  demand,  and  points  out  that  estates  would  rise 
from  quick  trading  with  bills,  and  become  greater  security,  — 

Whereby  to  borrow  more  Bills  to  the  doubling  of  such  increase,  and  so 
ad  infinitum. 

Now  this  perpetual  doubling  the  Increase  of  their  stock  is  of  so  great  con- 
cernment, as  though  men's  Trading  should  be  but  ordinary  ;  yet  it  will  make  an 
Estate  of  1000/.  to  amount  in  40  years  to  500  millions  .  .  .  and,  by  consequence, 
it  would  make  the  people  of  this  Nation  to  be  worth  in  40  years  (the  World 
affording  but  Commodity  enough  for  Money)  five  hundred  thousand  times  more 
than  now  they  are  ;  that  is,  he  who  is  now  worth  but  twenty  shillings  to  be 
worth  five  hundred  thousand  pounds  and  so  of  others  proportionally. 

In  his  "  Humble  Proposals  "  the  author  makes  the  pregnant 
suggestion  that  obstructions  in  law  to  transferring  bills  be  removed, 
"  to  which  purpose  there  is  a  Petition  it  seems  already  presented  ;  " 
and  in  the  "  Essay "  he  makes  a  distinct  proposition  for  a  land 
bank,  of  which  this  is  a  summary  :  — 

1.  That  100  places  be  appointed  for  payments  to  be  made,  etc. 

2.  That  all  payments  above  10/.  or  20/.  be  required  to  be  made  in  Bank 
credit. 

3.  That  there  be  no  way  to  raise  this  credit  in  Bank  but  by  the  mortgaging 
of  land  at  6  per  cent. 

Besides  giving  landed  men  credit  at  two  per  cent  (.-')  and  a 
large  revenue  to  the  public,  this  would  avoid  "  all  danger  of  sur- 
prise (as  lately  in  Holland),  there  being  (by  the  law  of  the  Bank) 
no  money  to  rest  there." 

Of  very  different  character  is  the  following  :  — 

"  Seasonable  Observations  Humbly  offered  to  his  Highness  the  Lord  Pro- 
tector. By  Sajnnel  Lainbe,  of  Lotidon,  Merchant.  Printed  at  the  Author's  charge 
for  the  Use  and  Benefit  of  the  English  Nation,  and  to  be  considered  of  and  put  in 
execution  as  the  High  Court  of  Parliament,  in  their  great  Wisdoms  shall  think 
meet.     Jan.  27,  1659."^ 

Having  in  mind  the  rivalry  of  the  Dutch,  Lambe  finds  a  bank 
the  best  means  of  coping  with  them  :  — 

A  bank  is  a  certain  Number  of  sufficient  Men  of  Estates  and  Credit  joined 
together  in  a  joint  Stock,  being,  as  it  were,  the  general  Cash-keepers  or  Treas- 
urers of  that  Place  where  they  are  settled,  letting  out  imaginary  Money  at  Interest 
at  2  and  i  or  3/.  per  Cent  to  Tradesmen,  or  others,  that  agree  with  them  for  the 

^  Reprinted  in  the  Soiners  Tracts,  ii.  164,  or  in  Scott's  edition,  ii.  446. 


J38  ESSAYS 

same,  and  making  Payment  thereof  by  Assignation,  and  passing  each  Man's 
Account  from  one  to  another  with  much  FaciHty  and  Ease,  and  saving  much 
Trouble  in  receiving  and  paying  of  Money,  besides  many  Suits  in  Law  and  other 
Losses  and  Inconveniences  which  do  much  hinder  Trade. 

He  proposes  that  the  management  of  the  bank  should  be  given 
to  merchants  chosen  by  the  great  trading  companies  of  London, 
like  the  East  India,  the  Turkey,  and  the  Muscovy  companies. 

That  all  be  at  Liberty  to  bring  in  any  Money  into  Bank  or  not,  and  if  any 
that  have  Money  there,  desire  to  have  it  again  in  Kind,  should  have  it  at 
Demand.  .  .  . 

That  they  let  out  imaginary  Money  on  Credit,  upon  Ticket,  at  2j  and  3/.  per 
cent  at  the  most. 

That  all  Bills  of  Exchange  be  received  and  paid  in  Bank. 

That  all  the  Profits  of  the  Bank  go  to  the  good  Men  that  manage  the  same, 
in  lieu  of  their  great  Care  and  Pains,  and  defraying  Bank  Charges,  and  Officers' 
Salaries,  or  so  much  as  shall  be  thought  fitting  to  be  reserved  towards  the 
Increase  of  the  Stock ;  and  as  the  Bank  increaseth  in  Credit,  so  the  Reservation 
to  increase  to  augment  the  Stock,  but  the  Stock  always  to  remain  whole  and  intire. 

Lambe  vv^as  satisfied  that  such  a  bank  would  so  encourage  trade 
and  be  so  convenient  that  others  would  soon  be  called  for  at  Edin- 
burgh, Dublin,  York,  Bristol,  and  Exeter,  "  for  the  Furtherance 
of  Trade,  by  holding  Correspondence  with  each  other,  than  which 
I  do  not  apprehend  or  know  any  way  better  to  equal  the  Dutch  in 
Trade,  both  at  home  and  abroad." 

Next,  we  have,  — 

"  An  Expedient  for  taking  away  all  Impositions  and  for  raising  a  Revenue 
without  Taxes,  by  Francis  Cradocke.     London,  1660.'"     12  pp.     4to. 

Also,  — 

"Wealth  Discovered  :    Or,  an  essay  upon  a  late  expedient  &c.,  by  F.  C. 
London,  1661."     pp.  viii.  44.     4to. 

In  the  former  of  these  pamphlets,  which  is  addressed  to  Charles 
II.,  the  author  gives,  with  little  change,  the  definition  of  a  bank 
already  cited  from  Lambe,  and  then  states  his  own  plan,  which  is 
somewhat  elaborated  in  "Wealth  Discovered."  He  proposes  to 
divide  the  kingdom  into  one  hundred  registry  districts,  and  to  make 
the  registration  of  titles  and  conveyances  of  real  estate  compulsory  ; 
then  to  establish  a  bank,  which  shall  lend  its  credit  upon  deposit 
of  goods  or  pledge  of  lands ;  this  credit  to  be  by  law  "  as  undeniably 


EARLY   BANKING   SCHEMES    IN   ENGLAND  139 

current  in  payment  "  of  debts  or  for  goods  as  gold  or  silver,  and  to 
be  given  out  at  three  per  cent ;  but  money  not  to  be  drawn  from 
the  bank. 

Now  that  such  credit  is  as  good  as  Money  will  appear,  if  it  be  observed,  that 
Money  itself  is  nothing  else  but  a  kind  of  security  which  men  receive  upon  parting 
with  their  Commodities,  on  a  ground  of  hope  or  assurance  that  they  shall  be 
repayed  in  some  other  Commodity  :  since  no  man  would  either  sell  or  part  with 
any  for  the  best  Money,  but  in  hopes  thereby  to  procure  some  other  Commodity 
or  Necessity,     (p.  14.) 

The  bank  credit,  he  thinks,  will  not  raise  the  prices  of  com- 
modities, for  they  can  be  imported,  but  will  raise  land  and  lower 
interest.  Cradocke  says  that  the  books  which  he  has  seen  on  banks 
are  Malynes,  "  Les  Mercatoria,"  Lewis  Roberts,  "  Mappe  of  Com- 
merce," 1  Henry  Robertson  [sic^,  "  Trade's  Increase,"  ^  and  Lambe, 
"  Seasonable  Observations."  But  all  these  he  finds  merely  en- 
courage imitation  of  other  countries  without  proposing  increase  of 
revenue,  whereas  by  his  bank  he  computes  that  the  public  would 
gain  a  revenue  upon  loans  of  ;^  1,730, 000  with  little  expense.  He 
notices  Potter,  and  thinks  him  an  ingenious  person,  and  refers  to 
"the  shops  of  Lombard  Street  (which  are  banks  in  effect)." 
That  his  bank  should  be  erected  without  the  use  of  money  he  finds 
to  be  an  advantage  ;  for  gold  and  silver  have  their  dangers,  and  so 
have  banks  which  are  based  on  them,  whereas  land  can  be  made 
to  answer  much  better. 

In  "Wealth  Discovered"  it  is  stated  that  April  12,  1661,  Cra- 
docke's  plan  was  referred  to  the  Council  for  consideration ;  and 
added  to  the  Council  are  Francis  Cradocke,  William  Godolphin, 
George  Monk,  Samuel  Hartlib,  Henry  Ford,  Sir  Peter  Leare,  Sir 
WiUiam  Petty ;  but  the  matter  appears  to  have  gone  no  farther.^ 

1  Lewis  Roberts,  "The  Merchant's  Mappe  of  Commerce,  wherein  the  Universal 
Manner  and  Matter  of  Trade  is  compendiously  handled.     London,  1638."     Fol. 

^  Henry  Robinson,  "England's  Safety  in  Trade's  Increase.     London,  1641."     4to. 

^  In  the  Calendar  of  State  Papers,  Domestic,  1661-1662,  p.  7S,  under  date  of  August, 
1661,  note  is  made  of  a  brief  description  by  Sir  B.  Gerbier  d'Ouvilly,  of  "a  Bank  of 
Exchange  as  very  beneficial.  .  .  .  To  make  the  credit  of  English  merchants  equal  to 
that  of  foreign,  there  should  be  a  bank,  with  a  large  stock,  under  fitting  governors,  such 
as  to  remove  all  jealousy  of  its  falling  into  the  hands  of  those  who  hold  the  militia,  with 
a  coinage  of  its  own,  called  bank  money,  and  ability  to  lend  on  real  estate."  Sir  Bal- 
thasar  Gerbier  probably  made  this  proposition  as  the  result  of  his  sojourn  in  the  Nether- 
lands during  the  Commonwealth. 


140  ESSAYS 

In  a  postscript,  Cradocke  explains  to  his  readers  that  he  is 
the  son,  not  of  Cradocke  the  preacher  to  Cromwell,  but  of  another 
of  that  name  who  lived  "  about  seventeen  years  since  "  in  Somer- 
setshire, near  Glastonbury,  had  an  estate  of  ;£5oo  per  year,  and 
lost  his  life  in  the  service  of  the  king.  He  also  makes  a  reference 
to  his  present  "  short  stay  in  England." 

The  impression  produced  by  the  success  of  the  Bank  of  Venice 
appears  strongly  in  the  pamphlets  of  Matthew  Lewis,  published 
in  1677  and  1678  :  — 

"  Proposals  to  increase  Trade  And  to  Advance  his  Majestie''s  Revenue  with- 
out any  hazard  or  charge  to  anybody,  and  with  apparent  profit  to  everybody. 
By  M.  Lewis.  London,  printed  for  Henry  Million  at  the  Sign  of  the  Bible  in 
Fleet  Street.     MDCLXXVIL"     16  pp. 

This  pamphlet  proposes  the  establishment  of  an  office  with 
warehouses,  where  advances  in  bills  of  credit  may  be  made  upon 
goods  for  not  exceeding  twelve  months,  the  bills  to  be  exchanged 
[discounted  .-*]  by  the  office,  if  desired,  "  into  Money  at  four  per 
cent."  The  example  of  Venice  is  more  than  once  referred  to  ;  as, 
e.g.  (p.  12),  "  Men  desire  Credit  at  Venice  (though  never  answered 
out  of  the  Bank  in  specie)  rather  than  Money ;  because  it  is  more 
safe  and  more  transferrable  than  Money."  Of  the  moderate 
charge  to  borrowers,  the  author  says  that  "  this  is  nothing  like 
the  borrowing  Money  to  the  Scrivener,  where  the  Security  is 
usually  sealed  at  a  Tavern,  and  the  Borrower  pays  the  Reckon- 
ing." 

'*  Proposals  to  the  King  and  Parliament  how  this  Tax  of  one  hundred  and 
sixty  thousand  pounds  per  Aloneth,  may  be  raised,  by  a  Monethly  Tax,  for  one 
Year,  without  any  Charge  to  any  particular  person,  and  with  great  advantage  to 
the  whole  Nation.  This  may  be  done,  by  setting  up  Banks  here,  like  the  Bank  at 
Venice.     By  M.  Lewis,  D.D.  London.     Printed  in  the  Year  1677."     7  pp.     8vo. 

Of  this  pamphlet,  nearly  half  is  taken  up  with  an  account  of 
the  Bank  of  Venice,  apparently  resting  on  the  authority  of  "  my 
Intelligencer,"  but  sustainable  by  "  several  Venetian  Merchants, 
that  have  lived  many  years  upon  the  place,  and  made  it  their 
business  to  understand  the  nature  and  constitution  of  this  Bank, 
called.  Banco  dc  al gcro  ;  A  Bank  of  transferring  Credit." 

The  writer's  plan  is  that  a  tax  of  ;!^  160,000  per  month  should 
be  laid  for  one  year ;    that  banks  in  every  country  town   should 


EARLY   BANKING   SCHEMES    IN    ENGLAND  141 

receive  the  money,  and  that  the  taxpayers  should  receive  bills  of 
credit  in  exchange,  these  bills  to  be  made  current  money,  and 
Parliament  to  pledge  its  faith  that  money  should  be  raised  in 
specie  to  answer  the  bills,  "  if  ever  it  be  desired."  The  case  of 
Venice  is  relied  upon  to  show  that,  while  the  government  could 
thus  have  the  use  of  the  money  obtained  by  this  levy,  its  credit 
would  be  a  practical  and  advantageous  substitute,  saving  the  tax- 
payers from  any  inconvenience. 

In  the  next  year,  the  indefatigable  author  produced  two  more 
pamphlets,  of  which  the  first  is  the  best  known  of  the  series :  — 

"  Proposals  to  the  King  and  Parliament,  or  a  large  Model  of  a  Bank,  Shew- 
ing how  a  Fund  of  a  Bank  may  be  made  without  much  charge  or  any  hazard, 
that  may  give  out  Bills  of  Credit  to  a  vast  extent,  that  all  Europe  will  accept  of, 
rather  than  Money.  Together  with  some  general  proposals  in  order  to  an  Act 
of  Parliament  for  the  establishing  this  Bank.  Also  many  of  the  great  advan- 
tages that  will  accrue  to  the  Nation,  to  the  Crown,  and  to  the  People,  are  men- 
tioned, with  an  answer  to  the  Objections,  that  may  be  made  against  it.  By 
M.  L.  D.D.  London.  Printed  for  Henry  Million  at  the  sign  of  the  Bible  in 
Fleet  Street  1678."     pp.  48.     4to. 

The  author  here  proposes  that  no  payment  oi  £\(X>  or  upward 
should  be  good  in  law,  unless  made  in  bank;  that  the  bank  should 
lend  upon  either  personal  or  real  security,  but  should  be  wary  at 
first  in  giving  out  credit  except  for  money ;  that  it  should  be 
empowered  to  buy  lands  and  ships,  to  set  up  "a  lomber,"  and  to 
engross  the  stock  of  tin  and  make  it  into  money  or  ingots  to  be 
money  at  the  market  price.  That  good  security  may  be  had  for 
loans,  he  proposes  that  the  registration  of  ships,  houses,  and  lands 
should  be  authorized,  all  adverse  claims  to  be  barred,  if  not 
brought  in  within  six  months  after  notice  given  of  registration. 
The  advantages  of  registration  are  discussed  incidentally ;  and  it 
is  complained  that  estates  are  settled  privately  and  titles  made 
uncertain,  so  that  land  formerly  worth  twenty  years'  purchase  or 
more  is  little  above  sixteen,  though  interest  is  at  six  per  cent. 

Lewis  enlarges  on  the  case  of  the  Bank  of  Venice,  which,  he 
says,  sprung  from  the  dishonesty  of  bankers.  "  The  Bankers  at 
Venice  did  just  as  our  Bankers  have  done  here,  they  got  Men's 
money  into  their  hands  at  Interest "  and  lent  it  to  insolvents  or 
"laid  it  out  in  desperate  cases  as  our  Bankers  did";  they  broke 
and  fled  from  the  territories  "  as  ours  do  into  the  Kins:s  BencJty    The 


142 


ESSAYS 


State  therefore  set  up  the  bank,  which  he  believes  to  be  "  a  perfect 
Credit  Bank  and  its  Fund  a  meer  imaginary  thing,"  and  yet 
"  credit  in  Bank  is  more  safe,  more  portable,  and  more  transferable 
than  money  in  specie,  and  so  of  greater  value,  as  Gold  is  better 
than  Silver."  On  the  difference  in  rate  between  bank  credit  and 
currency,  both  at  Venice  and  Amsterdam,  he  dwells  at  some 
length,  returning,  however,  to  the  above  explanation. 

"A  Short  Model  of  a  Bank  Shewing  how  a  Bank  may  be  erected  without 
much  trouble,  and  without  any  charge  or  hazard  to  any  body,  and  with  apparent 
profit  to  every  body,  except  Theeves,  Brokers,  and  griping  Usurers,  which  Bank 
will  be  able  to  give  out  Bills  of  Credit  to  a  vast  extent  that  all  persons  will  accept 
of  rather  than  Money.     By  M.  Lewis,  D.D."     [No  place  or  date.]     8  pp. 

This  pamphlet  refers  the  reader  to  "  a  larger  discourse  of  this 
Model  at  Mr.  Million's,"  and  then  gives  a  summary  as  follows:  — 

The  Epitome  of  this  Compendium  is,  when  the  Nation  is  divided  into 
Precincts,  erect  an  Office  in  each  Precinct  to  return  Money. 

Order  all  greater  Payments  to  be  made  at  these  Offices,  where  any  person 
may  leave  his  Money  without  interest,  and  take  a  Bill  of  Credit  for  it  of  the 
Office,  which  shall  be  made  transferrable. 

That  the  Bill  of  Credit  may  be  current ;  let  the  whole  Precinct  be  obliged  to 
make  good  the  acts  of  their  Office,  as  in  case  of  Robbing. 

That  the  Precinct  may  not  be  damnified,  let  them  choose  their  own  Officers, 
who  shall  give  security  to  them. 

They  shall  also  choose  four  and  twenty  substantial  persons  to  meet  once  a 
Month  to  supervise  their  stated  Officers. 

These  four  and  twenty  shall  dispense  Money  lying  dead  in  the  Office,  as  oft 
as  they  please. 

Much  of  the  running  cash  of  the  Nation  will  in  a  little  time  pass  througli 
these  offices,  and  all  that  can  will  leave  it  there,  and  take  a  Bill  of  Credit 
of  the  Office :  because  this  Bill  of  Credit  will  be  more  .safe,  more  portable,  more 
transferable,  and  so  of  greater  value  than  Money,  as  Gold  is  (for  these  reasons) 
better  than  Silver. 

Hence  these  Officers  will  have  a  vast  Credit,  which  is  equivalent  to  so  much 
Money  in  specie,  and  may  do  whatever  any  can  do,  that  have  an  inexhaustible 
treasure. 

To  these  notes  the  better  known  schemes  of  Briscoe  and  Cham- 
berlayne  are  the  proper  sequel ;  but  it  is  unnecessary  to  pursue 
the  subject.  Before  the  close  of  the  seventeenth  century,  the  rise 
of  private  banking  had  done  much  to  clear  the  public  mind,  the 
land  bank  scheme  was  sanctioned  only  in  modified  form,  and 
the  establishment  of  the  Bank  of  England  had  come  about  as  the 
natural  result  of  experience  and  the  final  prevalence  of  sound  ideas. 


THE   BANK   OF   VENICE  i 

An  often  repeated  and  long  accepted  legend  respecting  the 
origin  of  the  Bank  of  Venice  carries  back  the  history  of  that 
remarkable  institution  to  the  latter  part  of  the  twelfth  century, 
A  public  debt,  contracted  not  far  from  1171,  is  said  to  have  been 
made  transferable  like  a  modern  registered  debt,  then  to  have  been 
found  useful  as  a  medium  of  payment,  to  have  become  the  nucleus 
of  a  system  of  deposits  and  transfers  of  money,  and  so  to  have 
developed  into  a  bank  of  deposit  of  the  primitive  type,  holding  a 
place  of  great  though  variable  importance  in  European  commerce 
for  more  than  six  centuries.  With  this  legend  have  been  joined 
confused  and  often  contradictory  statements  as  to  a  "  money  of 
account "  of  mysterious  nature  created  by  the  bank,  and  the 
superiority  of  this  "  imaginary  money "  to  actual  cash  in  hand. 
Owing,  perhaps,  to  the  aversion  of  the  Venetian  government  to 
anything  hke  pubUcity  in  the  management  of  its  business,  even 
the  Venetian  historians  were  sometimes  misled  by  the  tradition  ; 
and  it  is,  therefore,  not  surprising  that  writers  in  other  countries 
followed  it  with  little  question. 

The  researches  of  Lattes  and  Ferrara  in  the  archives  of  the 
Frari  destroyed  the  familiar  legend  twenty  years  ago  ;  and  the  date 
and  manner  of  the  establishment  of  the  Bank  of  Venice  were  then 
settled  as  definitely  as  the  chartering  of  the  Bank  of  England. 
The  traditional  fable  has  perhaps  been  more  persistent  in  English 
than  in  any  other  language,  still  holding  its  place  in  the  most 
recent  encyclopaedias,  English  and  American  ;  ^  but  elsewhere  it  is 
effectually  discredited,  and  ceases  to  adorn  the  history  of  mediaeval 
banking.  It  would  hardly  be  worth  while,  then,  to  revive  the  sub- 
ject here,  were  it  not  for  the  light  which  the  documentary  evidence 

^  Quarterly  Journal  of  Economics,  K^trW,  1892. 

2  McLeod,  "  Dictionary  of  Political  Economy,"  p.  69,  rejects  the  fabled  connection 
of  the  Venetian  monii  of  the  twelfth  and  succeeding  centuries  with  the  beginning  of 
public  banking  in  1587;   but  his  erudition  has  often  failed  to  command  proper  attention. 

143 


144 


ESSAYS 


throws  upon  the  early  practice  of  private  banking  in  Venice  and 
upon  the  place  which  the  public  bank  and  its  credit  really  held  in 
the  commercial  organization  of  the  city  for  the  last  two  centuries 
of  Venetian  independence. 

The  leading  documents  relating  to  this  subject,  which  are  now 
within  reach  of  the  public,  may  be  classified  as  follows :  — 

1.  A  series  of  acts  of  the  Venetian  Senate,  nearly  forty  in 
number,  ranging  from  the  year  1270  to  1530  and  regulating  the 
business  of  private  bankers,  brought  to  Hght  by  Professor  Elia 
Lattes,  and  reprinted  by  him,  apparently  with  great  fidehty  to  the 
text  of  the  original  records,  in  his  work,  "  La  Liberta  delle  Banche 
a  Venezia  dal  secolo  XIII  al  XVII,"  published  at  Milan  in  1869. 

2.  A  mass  of  original  papers  relating  to  Venetian  private 
banks  from  the  fourteenth  century  to  the  end  of  the  sixteenth, 
collected  from  public  and  private  sources  by  Professor  F.  Ferrara, 
and  published  by  him  in  part  in  the  ArcJiivio  Vcneto  for  1871,  and 
also  used  by  him  as  material  for  a  paper  on  the  ancient  banks  in 
Venice,  published  in  the  Nuova  Antologia  for  January  and  Feb- 
ruary, 1871.^ 

3.  The  acts  of  the  Venetian  Senate  of  1584  and  1587,  under 
which  the  first  public  bank  in  that  city,  the  Banco  di  Rialto,  was 
established  ;  several  other  acts  regulating  the  affairs  of  that  bank  ; 
a  speech  made  in  the  Senate,  in  1584,  by  Tommaso  Contarini,  in 
favor  of  establishing  a  public  bank ;  and  a  speech,  by  an  unknown 
senator,  opposing  such  an  establishment.  These  are  collected  and 
printed  with  great  care  by  Lattes. 

4.  The  act  of  the  Senate  of  May  3,  1619,  establishing  by  the 
side  of  the  Banco  di  Rialto  a  second  public  bank,  known  as  the 
Bancogiro,  or  Banco  del  Giro,  which  ultimately  became  the  only 
public  bank  of  the  city  and  was  famous  throughout  Europe  for  gen- 
erations as  the  Bank  of  Venice.     This  act  is  also  given  by  Lattes.^ 

5.  The  rules  and  regulations  of  the  Bancogiro,  put  in  force  by 
the  Senate  and  published  by  its  authority  in  1663,  and  also  given 
by  Marpergcr,  in  his  "  Beschreibung  der  Banquen." 

'  Ferrara  explains  with  great  frankness  that,  in  his  introduction  of  Volume  VI.,  2d 
Series,  of  the  Biblioteca  degli  Economisti,  he  had  himself  helped  to  propagate  the 
favole  which  Lattes  destroyed  by  irrefragable  proofs.  See  especially  Ferrara's  "  Awer- 
tenza  Preliminare,"  in  the  Archivio  Veneto,  vol.  i. 

2  A  translation  may  be  found  in  the  Quarterly  Journal  of  Economics,  April,  1892. 


THE    BANK    OF    VENICE  I45 

6.  A  discourse  upon  the  Bancogiro  communicated  by  the 
French  ambassador  in  Venice  to  his  own  government  in  1786,  and 
referred  to  by  Daru  in  his  "  Histoire  de  Venise,"  but  printed  for 
the  first  time  in  the  Appendix  of  the  Quarterly  Journal  of  Eco- 
noviics  for  April,  1892,  and  containing  the  fullest  contemporary 
account  yet  published  of  the  bank  and  its  methods  in  the  last 
years  of  its  existence. 

These  documents  present  a  distinct  picture  of  banking  in  its 
true  sense,  as  an  entirely  spontaneous  growth  during  the  flourish- 
ing period  of  Venetian  commerce,  carried  on  by  private  individuals, 
and  exhibiting  the  mixture  of  advantages  and  abuses  which  have 
been  its  familiar  results  in  every  country  and  age ;  and  they  also 
show  the  Bank  of  Venice  to  have  been  established,  not  by  gradual 
development  or  chance,  but  by  deliberate  purpose,  in  order  to  take 
under  the  guarantee  of  public  authority  some  of  the  functions 
which  for  two  hundred  and  seventy  years  or  more  had  been  per- 
formed by  private  bankers. 

It  is  tolerably  clear  that  private  banking  in  Venice  began  as  an 
adjunct  of  the  business  of  the  campsores,  or  dealers  in  foreign 
moneys.  In  a  city  having  a  great  and  varied  trade  with  many 
countries,  these  dealers  necessarily  held  an  important  place,  close 
to  the  stream  of  payments  which  was  constantly  in  motion.  As 
early  as  1270  it  was  deemed  necessary  to  require  them  to  give 
security  to  the  government  as  the  condition  of  carrying  on  their 
business,  but  it  is  not  shown  that  they  were  then  receiving  deposits. 
In  an  act  of  September  24,  13 18,  however,  entitled  "  Bancherii 
scriptae  dent  plegiarias  consulibus,"  the  receipt  of  deposits  by  the 
campsores  is  recognized  as  an  existing  practice,  and  provision  is 
made  for  better  security  for  the  benefit  of  depositors.^  Whether 
the  title  of  this  act  is  contemporary  or  not,  its  text  shows  that 
somewhere  between  1270  and  13 18  the  money-changers  of  Venice 
were  becoming  bankers,  by  a  method  similar  to  that  by  which  the 
same  class  of  men  in  Amsterdam  a  couple  of  centuries  later,  and 

1  The  acts  of  March  8,  1270,  and  September  24,  131 8,  are  given  by  Lattes,  pp.  26, 
28.  Lattes  thinks  that  the  "  natural  scope  "  of  the  former  covers  security  for  depositors. 
The  opinion  of  Ferrara  is  to  the  contrary  {Niiova  Antologia,  January,  1871,  p.  183)  ;  and 
it  does  not  appear  that  any  direct  evidence  has  been  found  to  show  that  in  1270  the 
campsores  were  receiving  deposits,  although  the  occasional  possession  and  use  of  money 
belonging  to  others  must  have  become  an  incident  of  their  business  very  early. 
L 


146 


ESSAYS 


later  still  the  London  goldsmiths,  became  bankers.  More  than 
once  in  the  next  half-century  provision  was  made  for  some  public 
oversight  of  the  cainpsorcs,  and  in  the  acts  the  terms  bancheruis  and 
banciis  became  frequent  in  what  seems  to  be  a  technical  use.  The 
number  of  bankers  appears  finally  to  have  become  considerable  ;  ^ 
and  the  tsrms  banais  scriptae  and  bajicJieriiis  scriptae  came  into 
use  in  the  sense  which,  in  their  Italian  equivalents  (as  banco  di 
scritta  or  banco  di  scrittura\  they  held  for  centuries,  denoting  the 
banker  who  keeps  written  accounts  of  transferable  deposits. 

The  documents  brought  to  light  by  Lattes  and  by  Ferrara 
give  us  the  names  and  tell  something  of  the  checkered  fortunes  of 
a  considerable  number  of  these  private  banks  which  flourished 
between  1348  and  1584,  Some  of  them  belonged  to  families  or 
men  of  high  standing,  as  the  banks  of  Soranzo,  Priuli,  Pisani, 
Lippomano,  Vendramin,  Sanudo,  and  of  Pisani  and  Tiepolo; 
some  of  them  stood  in  close  relations  and  high  favor  with  the 
government  of  the  day ;  several  of  them  went  through  the  phases 
of  failure,  reorganization,  and  resumption  more  than  once  ;  and, 
in  fine,  of  the  banks  now  known  by  name  Ferrara  was  only  able 
to  find  one,  the  house  of  Soranzo,  which  after  an  existence  of  over 
a  century  closed  its  affairs  by  payment  in  full,  — a  trombe  e  pifferi. 
The  list  as  we  now  have  it  comprises  rather  more  than  twenty 
names,  including  probably  the  most  important.  But  the  speech 
of  Tommaso  Contarini  in  1584^  sets  the  number  of  banks  known 
to  have  existed  at  one  hundred  and  three,  "  of  which  ninety-six 
have  come  to  a  bad  end  and  only  seven  have  succeeded."  And 
yet,  notwithstanding  a  train  of  disasters  nearly  two  centuries  and 
a  half  long,  the  service  rendered  by  the  banks  to  commerce  had 
been  such,  on  the  whole,  as  to  lead  Contarini  to  argue  that  to  pre- 
serve the  trade  of  the  city  without  banking  was  not  only  difficult, 
but  impossible. 

A  series  of  acts  beginning  in  the  fourteenth  century  and  run- 
ning through  the  fifteenth  and  sixteenth  show  plainly  that   this 

^  This  is  to  be  inferred  from  the  languafje,  explicit,  if  not  classical,  of  the  act  of 
August,  1374,  giving  the  bad  condition  of  the  banks  as  a  reason  for  placing  them  under 
the  charge  quinquc  snpietttuni :  "Quia  est  providendum  de  necessitate  pro  bono  terrae 
nostrae  et  mercatorum  et  mercationum  etiam  nostri  communis  super  facto  bancorum 
Rivoalti,  quae  non  possent  stare  in  peiori  termino  eo  quod  sunt  ad  praesens  Consideratis 
damnis  et  incommodis,  quae  fiunt  toti  terrae,"  etc.     See  Lattes,  p.  t,'^. 

2  Ibid.,  p.  1 24. 


THE   BANK    OF   VENICE  147 

service  was  rendered  by  means  of  deposit  accounts.  How  early 
the  convenience  of  making  payments  by  transfers  on  the  books  of 
a  banker  was  understood  there  is  nothing  to  show.  An  act  of 
1403  ^  recites  that  great  sums  are  placed  in  the  hands  of  the 
bancherii  scriptae  ;  and  an  act  of  1421^  deals  with  some  evils  which 
had  arisen,  in  terms  which  imply  not  only  the  receipt  and  pay- 
ment of  deposits,  but  their  use  in  payment  of  bills  of  exchange. 
In  144 '5^  it  was  thought  necessary  to  require  the  bankers  to  be 
presen„"  daily  for  a  certain  number  of  hours,  and  a  penalty  was 
imposed  se  non  sentaranno  et  scrivcranno  as  required,  in  conse- 
quence of  the  loss  to  merchants  occasioned  by  their  irregularity. 
Passing  by  numerous  acts  for  regulating  or  reforming  the  banks, 
vve  come  to  an  act  of  1526,  entitled  "  Ordinationes  circa  bancos  a 
sc^'^^ta,"  and  evidently  designed  to  restore  regularity  and  honesty 
in  a  long-established  business.  In  this  act  we  find  the  following 
provisions,*  showing  distinctly  the  form  which  banking  transactions 
had  then  taken  :  — 

7.  It  shall  be  free  for  every  one  to  accept  or  not  accept  a  credit  in  bank 
(^partida  de  barico)  for  contracts  made  heretofore  ;  but  this  shall  not  be  refused 
for  those  made  hereafter,  unless  by  express  agreement  it  shall  have  been  declared 
that  payment  shall  be  made  outside  of  bank. 

8.  Credit  in  bank  shall  not  be  written  off  to  any  one  for  any  amount  in  his 
absence;  but  credits  shall  be  written  with  both  parties  present. 

9.  Bankers,  as  aforesaid,  must  pay,  to  those  who  wish,  in  cash  at  once  and  in 
hand  their  money  in  good  and  heavy  gold,  or  good  moneys  at  the  market  rates, 
or  rates  current  at  our  offices  ;  and,  if  any  should  refuse,  they  shall  be  subject  to 
the  penalty  of  twenty-five  ducats,  and  the  proveditor  then  present  shall  none  the 
less  make  them  pay. 

But  the  language  in  which  Contarini  discusses  the  usage  of 
Venetian  merchants  is  enough  to  show  that  in  1584  the  transfer 
of  credit  had  long  been  an  important  means  of  payment.  A  com- 
parison made  by  him  with  the  practice  at  Antwerp  and  at  the 
Lyons  fail  makes  it  certain  also  that,  in  his  mind,  the  convenience 
to  be  obtained  by  the  use  of  credit  did  not  arise  from  any  such 
substitution  of  credit  for  money  as  should  enable  the  community 
to  dispense  with  any  part  of  its  stock  of  cash,  but  from  the  simple 
fact  that  the  transfer  in  bank  saved  the  necessity  of  counting  coin 
and  of  its  manual  delivery  in  every  transaction.     The  coin  itself 

1  See  Lattes,  p.  44.  ^  jhid.^  p.  47.  3  Ibid.,  p.  56.  *  Ibid.,  p.  91. 


148  ESSAYS 

had  been  deposited  as  the  foundation  of  the  credit,  and  was  to  be 
paid  on  delivery  :  the  creation  of  a  credit  without  such  deposit 
was  in  his  view  an  abuse ;  but  payments  could  be  made  by  the 
transfer  of  the  right  of  the  depositor  to  demand,  with  such  facility 
as  to  enable  merchants  to  carry  on  dealings  to  an  extent  otherwise 
impossible.  "  Buyer  and  seller  are  satisfied  in  a  moment,  while 
the  pen  moves  over  the  page:  whereas  a  day  would  not  be  enough 
to  complete  the  contract  for  a  great  mass  of  merchandise  by  count- 
ing a  great  number  of  coins."  To  this  simple  but  important  use 
of  bank  credit  the  Venetian  Senate  was  unable  to  restrict  the  pri- 
vate bankers ;  and  it  was  to  secure  the  advantage  of  payment  in 
this  convenient  form,  without  the  risks  of  private  mismanagement, 
that,  as  we  shall  see,  the  public  bank  was  afterwards  established. 

The  nature  of  the  case,  however,  gave  a  much  wider  scope  to 
the  business  of  the  private  bankers  than  the  primitive  function  of 
deposit-keeping.  "  Those  who  open  banks,"  says  Contarini,  "  do 
not  undertake  this  labor,  and  subject  themselves  to  the  burden  of 
being  cashiers  for  all  the  money  in  the  market  merely  for  the  sake 
of  holding  it,  but  in  order  to  trade  with  it,  and  by  trading  to  make 
gains."  In  1374  an  act  forbids  any  one  qui  tejicat  bancum  de 
scripta  to  be  concerned  in  any  way  in  dealings  in  copper,  tin,  iron, 
lead,  saffron,  or  honey,  or  in  the  purchase  of  silver  at  public  sale.^ 
This  prohibition  was  somewhat  relaxed  by  the  Senate  in  1386, 
1387,  and  1390;^  but  in  1403  an  act  was  passed  forbidding  any 
banker  to  ship  or  send  away  by  land  either  merchandise  or  money 
beyond  the  amount  of  one  and  a  half  times  the  loans  which  he 
might  have  made  to  the  republic.^  This  singular  restriction,  which 
is  treated  by  Lattes  as  a  remarkable  anticipation  of  the  legislation 
of  the  United  States  requiring  from  national  banks  a  deposit  of 

1  Lattes,  p.  34.  Lattes  supposes  the  fluctuating  price  of  these  articles  and  the  dif- 
ficulty of  converting  them  into  cash  at  all  times  to  have  made  them  unfit,  in  the  opinion 
cf  the  Senate,  to  be  held  by  bankers.  P'errara  has  the  well-grounded  opinion  that,  besides 
hindering  bankers  from  placing  deposited  money  in  trade,  the  Senate  also  wished  to 
prevent  any  monopoly  of  certain  articles  of  great  importance.  Nuova  Antologia,  Janu- 
ary, 1 87 1,  p.  187. 

2  See  Lattes,  pp.  39-41.  The  act  of  1386  recites  that  the  house  of  Soranzi  have 
petitioned  for  some  relief  for  the  l)ankers  because  "  ipsi  sunt  onusti  mercationibus  olei, 
et  aliis  mercationibus,  de  quibus  male  possunt  exire,  si  ipsas  ad  ferrum,  et  alia  l)arrattare 
non  possunt,  sicut  alii  cives  nostri,"  and  because  of  the  small  gains  of  banking.  In  1430 
the  law  was  again  relaxed  at  the  instance  of  the  Soranzi.     Lattes,  p.  55. 

3  //'?■(/.,  p.  44. 


THE   BANK   OF   VENICE  T49 

public  securities,  is  at  any  rate  important  as  showing  a  wide  range 
of  investment  opened  to  the  bankers  in  1403,  provided  the  public 
securities  bore  a  certain  proportion  to  the  whole.  The  laws  show 
other  traces  of  loans  made  by  the  banks  to  the  republic  ;  and 
Ferrara's  researches  enabled  him  to  compile  a  list  of  such  loans 
for  the  years  1457  to  1507,  amounting  to  rather  more  than  five 
million  lire  of  the  present  day.^  But  the  language  of  Contarini  is 
enough  to  show  the  variety  of  methods  in  which  the  bankers  used 
the  funds  confided  to  them  by  depositors.  Trade  with  the 
Levant,  the  western  trade,  corn,  exchange,  the  accommodation  of 
friends,  the  purchase  of  lands  and  houses, — these  were  typical 
classes  of  a  banker's  investments  in  that  age.  That  loans  to  indi- 
viduals had  some  place  among  the  bankers'  use  of  capital  is  shown 
by  an  act  of  1467,  limiting  to  ten  ducats  the  amount  which  could 
be  lent  to  any  person  upon  a  single  obligation.^  But  the  restric- 
tions imposed  by  the  canon  law  upon  the  reservation  of  interest 
impeded  loans  of  this  kind,  and  probably  hindered  the  definition 
and  even  the  growth  of  legitimate  banking  investments.  Mercan- 
tile adventure  long  continued  to  be  the  banker's  natural  employ- 
ment of  his  funds ;  and  the  dangers  of  such  employment,  pointed 
out  with  great  distinctness  by  Contarini,  were  keenly  felt  by  the 
Venetian  public  century  after  century. 

Nothing  shows  when  the  Venetian  bankers  first  learned  that, 
besides  the  money  actually  received  from  depositors,  they  could 
also  make  use  of  credits  opened  on  their  books,  but  not  represent- 
ing any  deposit,  and  when  they  began  in  this  manner  the  modern 
system  of  issue.  The  idea  must  have  come  soon  after  the  trans- 
fer of  deposits  became  common.  The  act  of  1374,  forbidding 
bankers  to  deal  in  certain  commodities,  declares  that  the  banker 
shall  nee  imitiiare  nee  faeere  seriptam  argenti  alieiii  q?ii  emeret  ar- 
gentwn  ad  eampanellam,  —  shall  neither  lend  nor  open  a  written 
credit  for  the  prohibited  purchase.     Another  act,  of  1450,  forbids 

^  Nuova  A7tiologia,  January,  1871,  p.  205.  The  loans  noted  by  Ferrara  are  those 
mentioned  in  scattered  documents,  and  it  is  certain  that  their  amount  is  far  below  the 
real  total. 

2  Lattes,  p.  72.  "...  Accomodare  non  possint  alicui  personae  maiorem  summam 
ducatorum  decern  sub  uno  quoque  signo."  On  the  somewhat  doubtful  meaning  of  this 
limitation,  see  a  remark  by  the  late  Professor  Nasse  in  his  review  of  early  Venetian  bank- 
ing in  Jahrbucher  fiir  Naiiotialdkonomie,  18S0,  p.  338;  and  Ferrara's  remark,  Nuova 
Antologia,  1S71,  p.  452. 


I50 


ESSAYS 


the  giving  of  credit,  either  to  any  foreigner  or  any  citizen,  for  the 
purpose  of  purchasing  silver,  except  for  such  money  as  he  shall 
really  have  in  the  bank.^  These  limitations  upon  the  extension  of 
credit  for  some  purposes  imply  strongly  that  its  extension  was  a 
recognized  practice  for  other  purposes ;  and  we  learn  from  Con- 
tarini  that,  in  the  sixteenth  century  at  any  rate,  such  was  the  case. 
The  banker,  he  says,  can  accommodate  his  friends  without  the 
payment  of  money,  merely  by  writing  a  brief  entry  of  credit.  The 
banker  can  satisfy  his  own  desires  for  fine  furniture  and  jewels 
by  merely  writing  two  lines  in  his  books,  and  can  buy  estates  or 
endow  a  child  without  any  actual  disbursement.^  In  short,  the 
Venetian  private  banks  had  become  banks  of  issue,  and  the  bank- 
ers found  many  temptations  in  the  way  of  a  prudent  use  of  this 
power. 

The  immediate  effect  of  the  over-issue,  to  which  the  bankers 
were  thus  tempted,  would  of  course  be  a  difficulty  in  meeting  the 
demands  of  depositors  and  the  resort  to  expedients  for  avoiding 
payment.  Embarrassment  of  this  sort,  as  well  as  actual  fraud,  is 
probably  the  explanation  of  a  long  series  of  practices  legislated 
against  by  the  Venetian  Senate.  When,  in  1445,^  the  bankers  were 
required  to  be  present  for  business  daily,  at  least  two  hours  in  the 
morning  and  two  after  dinner,  instead  of  presenting  themselves 
merely  qtiando  et  quanta  voleno,  we  may  be  sure  that  the  Senate 
intended,  among  other  things,  to  provide  for  depositors  who  might 
wish  to  draw  out  their  money.  The  requirement  in  1467  that 
bankers  should  show  to  any  person  the  books  containing  his  ac- 
counts and  balances,  ratiojics  et  resta  sua  ;  ^  the  strict  provision  in 
1523  that  the  bankers  should  have  ready  on  the  counter,  sopra  li 
bancJii  taiir  conveniente,  the  money  for  making  their  payments  in 
full  and  publicly,'^  and  must  count  it  out  sopra  il  banco  or  be 
responsible  for  any  deficiency  sworn  to  by  the  payee, — these 
provisions  may  have  been  directed  against  debtors  avoiding  pay- 
ment either  from  embarrassment  or  fraud.  But  when  the  law  of 
1526  declares   that   bankers  shall  not,  upon  a  demand  for  cash, 

'  Latles,  p.  34,  note,  and  p.  70. 

2  So,  too,  in  the  speech  against  the  establishment  of  a  public  bank  published  by 
Lattes,  "  i  mercadanti  si  servivano  della  commodity  dei  banchi  particulari,  scrivendo 
partide,  seben  non  havevano  alcun  credito  in  banco,  6  seben  il  credito  era  inferior  assai 
a  i  danari,  che  scrivcvano  ad  altri."     Lattes,  p.  152. 

8  Ibid.,  p.  56.  *  Ibid.,  p.  72.  ^  Ibid.,  p.  82. 


THE   BANK    OF   VENICE  151 

send  the  creditor  to  another  bank  with  an  order  upon  it,  and  so 
wear  him  out  by  sending  him  from  one  to  another,  nor  say  that 
there  is  an  error  and  that  accounts  must  be  compared,  nor  delay 
or  refuse  to  transfer  to  a  person  likely  to  demand  actual  payment,^ 
we  are  instantly  reminded  of  the  shifts  of  insolvency.  The 
repeated  increase  of  the  security  to  be  given  by  bankers,  which  in 
1523  had  risen  to  25,000  ducats;  the  summary  jurisdiction  over 
questions  between  bankers  and  depositors,  given,  by  various  acts 
from  142 1  to  1523,  to  designated  public  officers;  and  other  pre- 
cautions into  the  detail  of  which  it  is  impossible  to  enter,  —  all 
show  that  the  republic  was  painfully  aware  that  prompt  payment 
was  not  always  the  first  object  of  the  Venetian  banker.  How 
much  the  repubhc  accomplished  by  its  efforts  to  regulate  the 
banks  is  doubtful.  In  one  or  two  cases  the  preambles  of  acts 
naively  admit  the  non-observance  of  previous  legislation.^  It  is 
enough  for  the  present  purpose,  however,  that  the  laws  disclose 
the  presence,  in  the  Venetian  private  banking,  of  precisely  the 
same  evils  and  mistakes  as  those  with  which  later  centuries  have 
had  to  struggle. 

With  a  system  of  banking  obligations  on  which  payment  is 
avoided  or  suspended,  depreciation  is  a  natural  result.  There  is 
reason  to  infer  from  the  law  of  1421^  that  this  evil  had  then 
shown  itself;  for  the  law  explains  that,  as  money  cannot  be 
drawn  from  the  banks,  there  is  a  practice  of  selling  credits  held 
against  them,  with  great  injury  to  the  state.  The  evil  appears 
more  clearly  in  1523,  when  the  law  declares^  that  the  banks  shall 
make  their  payments  without  deduction  for  cd.sh,  far  li  paganienti 
integri  et  sensa  alcuna  dimimizione,  and  also  forbids  the  purchase 
or  sale  of  cash  with  bank  credits,  —  a  prohibition  which  implies  a 
difference  in  value,  and  hence  a  depreciation  of  the  credit.  But 
the  "  Ordinationes  circa  bancos "  of  1526^  declare  in  so  many 
words  that  the  extortion  practised  by  the  bankers  upon  those 
who  wished  for  money  had  then  reduced  the  bank  credit  twenty 
per  cent  below  the  level  of  cash.  The  remedy  applied  was 
vigorous.     The  number  of   the  sopra  bancJii  already  in  office  as 

1  Lattes,  p.  92. 

"^  See  especially  Lattes,  p.  69,  where,  in  1447,  it  is  said  of  an  act  of  1421,  "  Sicut 
notum  est  talis  ordo  nunquam  fuit  observatus,  nee  presenti  tempore  observatur." 
8  Lattes,  p.  47.  4  Ibid.,  p.  82.  5  jn^^^  p.  gg. 


152 


ESSAYS 


inspectors  of  the  banks  was  increased,  so  as  to  give  one  for  each 
bank,  their  presence  day  by  day  during  banking  hours  was 
required,  and  large  powers  were  given  to  them.  Dealings  in 
bank  credit  with  an  agio  for  cash,  con  alcn7t  laza,  were  then  for- 
bidden. It  was  ordered  that  exchange  should  be  sold  at  one  price, 
whether  for  cash  in  hand  or  in  bank,  and  that  payments  for  goods 
or  for  other  cause  should  be  made  in  the  same  way,  the  bank 
credit  to  be  taken,  if  at  all,  on  the  footing  of  cash,  ducat  for  ducat, 
the  bankers  being  at  the  same  time  required  under  penalty  to 
maintain  their  payments  in  cash.  In  the  preamble  of  a  law 
respecting  money-changing  passed  in  1528^  it  is  recited  that 
these  provisions  had  brought  the  bank  ducat  and  cash  to  equal- 
ity of  value.  Two  years  later  a  law  respecting  bills  of  exchange 
makes  the  same  recital,  but  adds  that  at  the  Lyons  fair  bills  had 
been  drawn  payable  in  bank  with  a  difference  of  two  and  a  half 
per  cent,  and  therefore  requires  that  bills  drawn  payable  in  bank 
shall  be  settled  at  the  rates  current  for  bills  made  payable  in  cash, 
Contarini's  statement  as  to  the  large  proportion  of  the  Venetian 
banks  which  ended  in  failure  has  already  been  noticed.  Details 
of  the  failure  of  several  have  been  collected  by  Ferrara,  the  cases 
of  the  Soranzi,  Garzoni,  and  Lippomani  being  the  most  remarkable. 
The  winter  of  1498-1499,  when  the  two  latter  failed  and  the  Pisani 
had  in  consequence  to  meet  a  run  by  depositors,^  appears  to  have 
been  a  season  of  panic  upon  the  Rialto.  There  are  also  indications 
of  serious  trouble  not  far  from  1523.  In  1584  came  the  failure  of 
the  house  of  Pisani  and  Tiepolo  for  500,000  ducats,  and  this  event 
apparently  brought  private  banking  in  Venice  to  its  end.  Its  his- 
tory, if  we  may  judge  from  the  fragments  which  have  survived,  was 
a  tale  of  repeated  disaster ;  and  yet  it  must  be  remembered  that 
the  events  which  appear  to  us  now  as  parts  of  a  single  picture 
were,  in  fact,  spread  over  the  greater  part  of  three  centuries,  dur- 
ing which  the  Venetian  public  continued  to  intrust  its  interests  to 
the  private  banks.  It  may  be,  therefore,  that,  if  we  could  restore 
the  proper  perspective  of  time  and  could  see  these  disasters  in  their 
true  relations  to  other  events,  the  Venetian  experience  might  not 

1  Lattes,  pp.  95-97 :  "  Essendo  per  1'  iddio  gratia  riddotti  li  banchi  nostri  de  scritta 
in  buon  esser,  che  tanto  e  al  presente  il  ducato  del  banco,  quanto  e  il  contado." 

2  A  lively  account  of  this  run,  given  by  Malpiero  and  cited  by  Ferrara,  may  be  found 
in  the  Arcliivio  Slorico,  Ser.  I.,  vol.  vii.,  p.  715. 


THE    BANK    OF   VENICE  1 53 

appear  more  unfortunate  or  even  more  checkered  than  that  of 
other  countries,  which  have  had  to  learn  by  actual  trial  how  to 
use  the  dangerous  forces  of  credit. 

But,  however  this  may  be,  the  Venetian  Senate  became  satisfied 
of  the  necessity  of  a  radical  change  of  system.  The  speeches  of 
Contarini  and  his  unknown  opponent  were  part  of  a  debate  which, 
in  a  few  months  after  the  failure  of  Pisani  and  Tiepolo,  ended  in 
the  act  of  December,  1584,  for  the  establishment  of  a  public  bank, 
to  be  called  the  Banco  della  Piazza  di  Rialto.  This  act  was  re- 
pealed in  the  following  April,  in  consequence  of  strong  opposi- 
tion ;  and  it  would  appear  that  the  city  was  left  for  the  next  three 
years  without  any  bank,  either  public  or  private,  to  the  great  con- 
fusion and  injury  of  its  business.  The  act  of  April  11,  1587,  at 
last  established  a  bank  of  deposit,  sometimes  called  the  Banco  di 
Rialto,  and  sometimes  the  Banco  della  Piazza.^  The  acts  of  1584 
and  1587  differed  in  some  important  particulars,  but  they  agreed 
in  their  main  purpose  of  giving  to  a  public  institution  the  deposit 
business  so  long  retained  by  the  private  bankers ;  and  we  can 
therefore  conveniently  confine  our  attention  now  to  the  act  of 
1587,  as  expressing  the  meaning  of  the  revolution  in  Venetian 
banking  which  took  place  in   1584.^ 

The  act  of  1587,  after  reciting  the  mischiefs  resulting  from  the 
ruin  of  the  private  banks,  the  great  need  of  a  bank  of  some  kind, 
and  the  conclusion  that  private  banks  could  not  supply  the  want, 
establishes  a  banco  de  scritta  for  three  years,  to  be  placed  under  the 
charge  of  a  governor  elected  by  the  Senate  for  the  same  term,  and 
under  the  inspection  of  the  Provcditori  soprabanchi.  The  bank 
was  required  to  receive  all  cash  deposits  offered  in  good  and  cur- 
rent money ;    the  money  was  to  remain    always    subject   to   call, 

1  The  acts  of  1584  and  15S7  are  given  in  full  by  Lattes,  pp.  loi  and  109. 

2  Morosini,  in  his  "  Historia  Veneta,"  under  the  year  1587,  says:  "  Negotiatorum 
quoque  incommodo  subvenire  decretum,  qui,  apud  privates  mensarios  pecunia  deposita, 
eorum  fraude,  avaritia,  crebrisque  decoctionibus  ingentes  jacturas  damnaque  patiebantur; 
ex  quo  publicis  etiam  redditibus  haud  parva  detrimenta  accedebant.  Itaque  lex  lata  in 
Senatu,  ut  publica  mensa  erigeretur,  in  qua  tuto  singuli  argentum  aurumque  adservarent; 
ei  Gubernator  praeficeretur,  qui  rite  atque  ex  ordine  cuncta  administranda  curaret ;  id 
munus  Francisco  Gradenico  primum  tributum."  But  Morosini  takes  no  note  of  the 
establishment  of  the  Banco  del  Giro  in  1619,  and  perhaps  supposed  that  bank  to  be  the 
same  as  the  "  mensa  "  of  1587. 


154 


ESSAYS 


sempre  pronto  a  reqicisition  di  creditori ;  transfer  in  bank  could 
be  made,  but  only  in  the  presence  of  the  depositor  or  by  his 
written  consent  lodged  in  the  office  of  the  sopraba7ichi ;  no 
transfer  could  be  made  in  blank,  but  credit  must  be  given  in 
account  to  the  transferee  at  the  same  time  that  the  transfer  was 
debited ;  and,  finally,  the  expenses  of  the  establishment  were  to  be 
met  by  means  of  the  duties  on  imported  goods.  In  December, 
1593,  a  further  act  provided  that  all  bills  of  exchange  should 
thenceforward  be  paid  by  transfers  in  bank  only.  It  is  evident 
from  these  provisions  that  the  Bank  of  the  Rialto  was  not  a  bank 
in  the  modern  sense,  as  the  private  banks  superseded  by  it  had 
been.  The  republic  wisely  declined  to  undertake  the  investment  of 
the  funds  intrusted  to  it,  sought  no  profit  from  the  use  of  its  credit, 
and,  in  short,  merely  undertook  to  keep  the  money  of  depositors 
in  safety,  and  to  pay  it  out  or  transfer  it  to  others  at  the  will  of  the 
owner.  At  a  given  moment  the  depositors  might  even  draw  out 
the  whole  of  the  cash,  in  full  satisfaction  of  their  claims,  if  they 
chose,  and  nobody  would  be  any  the  worse.^  Certain  of  the 
functions  of  the  private  banks  were  thus  selected  and  made  the 
work  of  the  new  establishment,  and  the  rest  were  disregarded.  It 
is  clear,  then,  that  this  development  of  the  Venetian  pubhc  bank 
from  the  business  carried  on  in  private  hands  had  no  possible 
relation  to  any  public  debt  or  to  any  use  which  the  state  might 
be  able  to  make  of  the  moneys  deposited  with  it. 

The  provision  made  in  1593  as  to  bills  of  exchange,  already 
referred  to,  was  for  two  centuries  an  important  regulation  of 
Venetian  commerce  ;  but  it  had  its  origin  from  a  special  cause.  It 
is  manifest  that,  so  long  as  the  Bank  of  the  Rialto  should  be  con- 
ducted in  accordance  with  its  fundamental  law,  payments  in  bank 
must  be  the  exact  equivalent  of  cash  payments,  since  the  payee  in 
bank  received  a  credit  convertible  into  cash  at  pleasure.  Debtors 
who  found  it  inconvenient  to  meet  their  debts  with  cash  would 
therefore  find  it  equally  inconvenient  to  meet  them  with  a  transfer 
in  bank.     This  led  to  a  practice  of  settling  bills  of  exchange  by 

'  It  is  worth  noting  that  the  governor  of  the  bank  was  forbidden  under  heavy  pen- 
alties to  traffic  in,  use,  or  lend  any  of  its  moneys.  Lattes,  p.  no.  Contarini's  discussion 
as  to  what  might  happen  in  case  of  war,  and  his  assertion  of  the  ability  of  the  bank  to 
pay  everj'thing  on  demand,  tanto  sara  il  dar,  quanto  P  haver,  is  important  as  showing 
that  commercial  and  not  fiscal  convenience  was  the  purpose  of  the  undertaking.  See 
Lattes,  p.  137. 


THE   BANK   OF   VENICE  155 

novation,  or  the  substitution  of  one  debtor  for  another,  like  that 
described  by  Contarini  as  existing  in  Antwerp.^  An  act  of  Novem- 
ber, 1593,  says,  "There  has  been  introduced  within  a  short  time  a 
notable  abuse  in  the  Piazza  di  Rialto :  that  payments  for  exchange 
and  merchandise,  which  ought  to  be  made  by  accounts  in  bank  or 
in  cash,  are  made  by  a  kind  of  transfer  in  which  debtors  assign  to 
their  creditors  each  one  his  debtor,  and  this  debtor  assigns  another, 
and  so  on,"  to  the  great  embarrassment  and  injury  of  creditors 
who  really  wish  for  their  money,  se  il  creditor  viiol  valcrsi  del  siio 
per  qtialclie  bisogno.  This  transfer  {giro')  of  debts,  when  cash  was 
really  due,  was  therefore  forbidden ;  and  a  few  days  later  the  act 
of  December  14,  1593,^  after  a  similar  recital  of  the  evil,  made  the 
well-known  requirement  for  payment  in  bank  of  all  bills  of  ex- 
change, under  severe  penalty.  The  increase  of  transactions  thus 
thrown  upon  the  bank  compelled  the  Senate,  in  April,  1594,  to 
authorize  an  increase  of  clerical  force  in  the  bank ;  and  they  then 
took  occasion  to  require  that  not  only  all  letters  of  exchange  drawn 
upon  Venice,  but  all  bills  of  a  similar  kind  drawn  at  Venice  and 
sold,  should  be  settled  for  in  bank,  thus  making  payment  in  bank  a 
legal  tender  for  all  commercial  paper  of  this  class. 

The  question  whether  the  public  bank  with  its  restricted  func- 
tions should  have  the  sole  occupation  of  the  field  of  banking  was 
finally  decided  by  convenience  rather  than  by  deep  policy.  The 
act  of  1584  had  forbidden  the  establishment  of  private  banks, 
restando  nelV  avenire  proJiibito  del  tiitto  a  particolari  il  Icvar  piii 
banchi;^  but  this  act  being  repealed,  and  the  act  of  1587  contain- 
ing no  such  prohibition,  the  establishment  of  private  banks  may 
be  said  to  have  become  possible,  although  for  several  years  bankers 
were  not  forthcoming.  But  in  February,  1596-1597,^  the  Senate, 
after  reciting  the  impossibility  of  meeting  all  the  needs  of  com- 
merce by  means  of  a  single  bank,  gave  to  Dionisio  Contarini,  who 
had  served  as  governor  of  the  public  bank,  leave  to  establish  a 
private  bank  for  six   years.     The  banker  bound  himself  to  give 

^  See  Lattes,  p.  121. 

2  For  the  two  acts  of  1593,  see  Lattes,  pp.  170,  171.  In  Colwell's  "Ways  and 
Means  of  Payment,"  in  a  chapter  on  the  Bank  of  Venice,  the  date  of  this  act  is  given 
on  the  authority  of  Savary  as  1423.  Mr.  Colwell,  adopting  the  traditional  account  as  to 
the  great  age  of  the  bank,  easily  accepted  a  date  which  carries  the  act  back  to  a  time 
when  there  was  no  public  bank  in  Venice,  and  long  before  the  establishment  of  any  such 
provision  as  to  exchange.  '  Lattes,  p.  102.  *  Ibid.,  p.  177. 


156  ESSAYS 

security  to  an  extent  declared  to  be  unexampled,  and  to  supply  the 
mint  annually  with  an  agreed  quantity  of  gold  and  silver.  All  his 
receipts  and  payments  were  to  be  in  good  money  of  lawful  weight, 
he  was  to  undertake  no  public  contract  for  merchandise,  and  pay- 
ments offered  by  transfer  upon  his  accounts  were  to  be  receivable 
only  at  the  pleasure  of  the  payee.  Nothing  more  has  yet  been 
brought  to  notice  respecting  Contarini's  bank;  but  in  1619  the 
Senate  again  gave  a  companion  to  the  Bank  of  the  Rialto  by  the 
act  of  May  3,  creating  the  famous  Banco  del  Giro,  —  the  great 
public  bank  whose  origin  is  so  often  said  to  date  from  the  twelfth 
century.^  The  two  banks,  organized  separately,  but  with  similar 
powers,  continued  to  work  side  by  side  until  1637,  when  the  Bank 
of  the  Rialto  was  discontinued  in  consequence  of  the  absorption 
of  its  business  by  the  Bancogiro  ;  ^  and  the  latter  was  then  left  as 
the  sole  occupant  of  the  field.^ 

The  circumstances  under  which  the  Banco  del  Giro  was  estab- 
lished are  stated  in  general  terms  in  the  preamble  of  the  act. 
Giovanni  Vendramin  had  contracted  to  supply  to  the  Venetian 
mint  a  large  amount  of  silver,  in  bulk  or  in  Spanish  reals,  and  to 
receive  payment,  one-half  in  coin  or  in  bank  credit,  and  the  other 
half  in  gold,  either  coined  or  in  bars ;  and,  as  the  rate  at  which  he 
supplied  the  silver  was  low,  the  republic  agreed  to  make  him  a 
large  loan  in  bank  credit.  At  the  same  time  there  were  merchants, 
to  whom  the  republic  was  indebted  for  goods  and  for  bills  of 
exchange,  who  had  received  assignments  upon  the  mint  and  other 
public  offices,  the  collections  upon  which  were  slow  and  embarrassed 
by  official  forms.  To  make  a  prompt  settlement  with  Vendramin 
and  with  the  other  creditors,  the  new  bank  was  created,  and  placed 
in  charge  of  an  officer  called  the  Depositario  del  Banco  del  Giro ; 
and  the  creditors  were  paid  by  being  credited  with  deposits  on  its 

1  The  act  is  given  in  full  by  Lattes,  p.  183.  As  for  repetitions  of  the  lef^end  re- 
ferred to  in  the  text,  it  is  enough  to  cite  among  the  latest,  "  Encyclopedia  Britannica  " 
(9th  ed.),  iii.  316;  Appleton's  "American  Cyclopxdia,"  ii.  273;  "  Dictionnaire  des 
Finances"  (1889),  i.  291. 

2  Rezasco,  who  made  a  diligent  search  in  the  Venetian  archives  for  matter  relating 
to  the  two  public  banks,  cites  the  order  abolishing  the  Bank  of  the  Rialto  as  dated 
January  2,  1637.     "  Dizionario  di  Linguaggio  Italiano  Storico  ed  Amministrativo,"  p.  85. 

^  The  Banco  del  Giro  was  so  named,  as  has  often  been  explained,  because  of  the 
continual  movement  of  credit  Ijy  transfer  from  one  depositor  to  another.  The  name 
distinguished  th^'  bank  from  the  Banco  della  Piazza,  but  the  practice  referred  to  by  it 
was  in  no  way  peculiar  to  the  new  bank,  as  has  been  shown  already. 


THE    BANK   OF  VENICE  157 

books.  To  enable  the  bank  to  meet  the  demand  for  payment  to 
which  it  was  thus  exposed,  a  large  sum  in  reals  received  from 
Vendramin  was  exchanged  at  the  Banco  di  Rialto  for  current 
money ;  and  this,  with  coin  struck  from  silver  in  bulk  supplied 
under  Vendramin's  contract,  was  placed  in  the  Banco  del  Giro,  to 
the  extent  of  150,000  ducats,  as  a  reserve.  It  was  also  provided 
that  payments  of  10,000  ducats  per  month  (increased  soon  after- 
wards to  30,000  ducats)  should  be  transferred  from  the  mint  to  the 
bank,  until  the  sum  of  500,000  ducats,  the  amount  of  the  payments 
to  be  made  to  public  creditors,  should  be  covered.^ 

The  greater  part  of  the  act  of  16 19  relates  to  the  organization 
of  the  bank  and  the  duties  of  the  officers  to  be  appointed ;  and 
there  is  little  pains  taken  to  explain  the  functions  of  the  institution 
so  carefully  officered  and  guarded.  There  is  enough  on  the  face 
of  the  act  to  make  it  clear,  however,  that  the  Banco  del  Giro  was 
to  be  a  deposit  bank  of  the  familiar  type,  holding,  transferring, 
and  paying  deposits  at  the  call  of  the  depositor,  like  the  existing 
Banco  di  Rialto,  but  performing  no  other  of  the  functions  of 
banking :  — 

That  in  this  new  Bank  it  shall  not  be  allowable  to  exact  any  charge  (jion  si 
possi  sawder)  from  merchants,  but  only  to  pay  in  cash,  except  to  those  who 
have  overdrawn. 

That  no  one  shall  refuse  payment,  in  said  Bank,  of  his  credits,  from  one 
hundred  ducats  upwards. 

That  transfers  of  any  amount  may  be  made,  although  of  one  hundred  ducats 
or  less,  at  the  convenience  of  merchants,  provided  the  parties  are  agreed. 

And,  as  the  reason  for  establishing  the  large  reserve  described 
above,  the  law  premises,  — 

Since  one  of  the  chief  and  most  necessary  considerations  as  to  this  Bank  for 
the  public  and  for  the  private  interest  is,  that  such  a  sum  be  assigned  to  it  that  not 
only  private  individuals  may  receive  promptly  whatever  sum  of  money  they  may 
need  to  draw  for  the  day,  but  that  always,  in  case  it  should  seem  good  to  this 

1  These  transactions  can  be  made  out  with  reasonable  clearness  from  the  preamble 
and  the  last  four  sections  of  the  act  of  1619  establishing  the  bank.  An  account  is  given 
of  them  by  Rezasco,  p.  82,  with  some  details  as  to  Vendramin's  contract  obtained  by 
examination  of  the  original.  There  is  also  a  brief  account  given  in  a  short  memoir  on 
the  public  banlcs,  written  near  the  end  of  the  seventeenth  century  by  the  senator  Ber- 
nardo Trevisan,  and  published  under  the  title  of  "  Informazione  per  il  Banco  del  Giro" 
in  Vigano's  translation  from  Sonnleithner,  "  La  Scienza  del  Commercio,"  p.  293. 


158  ESSAYS 

Council  to  proceed  to  close  the  said  Bank,  the  Capital  may  be  ready  in  sufficiency 
to  pay  to  every  one  his  just  due, 
Therefore,  be  it  ordered,  etc.^ 

These  provisions  undoubtedly  contemplated  the  establishment 
of  a  cash-paying  deposit  bank,  of  which  the  reserve  was  supposed 
to  be  sufficient  at  the  start  for  all  probable  demands,  and  was  to 
be  increased  to  the  point  of  equality  with  the  total  Uability.  The 
credit  of  the  bank  was  to  be  sustained,  therefore,  not  only  by  the 
good  faith  and  policy  of  the  repubhc,  but  ultimately  by  the  actual 
presence  of  all  the  money  which  the  credit  might  represent.  This 
system  contained  the  least  possible  mystery,  either  as  regards 
theory  or  practical  operation ;  and  the  Bancogiro  would  have  been 
simply  a  second  Bank  of  the  Rialto  but  for  the  fact  that  the  debts 
of  the  republic  to  Vendramin  and  the  other  public  creditors  were 
the  occasion  for  its  creation.  As  it  was,  instead  of  opening  for 
business  with  neither  liabilities  nor  cash  on  hand,  as  a  simple  bank 
of  deposit  might  have  opened,  the  Bancogiro  began  with  a  large 
liability  upon  its  books  to  certain  creditors  of  the  state,  and  with  a 
considerable  resource  in  cash,  which  the  state  agreed  to  fill  up  to 
the  full  amount  of  the  liability.  If  we  imagine  the  case  of  a 
government  taking  advantage  of  a  demand  for  paper  circulation 
by  paying  its  creditors  in  notes  convertible  on  demand,  with  the 
purpose  of  gradually  accumulating  in  its  treasury  cash  equal  to  the 
amount  of  notes  in  use,  we  should  have  a  case  strongly  resembling 
the  operation  undertaken  by  the  Venetian  Senate  in  establishing 
the  Bancogiro  as  one  of  its  public  offices. 

These  circumstances  afford  some  explanation  for  the  tradition 
that  the  Bank  of  Venice  was  originally  a  pubUc  debt;^  and,  taking 
into  account  further  the  fact  that  the  Banco  del  Giro  superseded 
the  Banco  di  Rialto  so  effectually  that  the  date  of  its  own  creation 
was,  as  it  were,  submerged,  and  that  the  transfer  of  deposits,  the 

1  This  statement  is  so  important  as  showing  the  object  of  the  reserve  that  it  is  worth 
while  to  present  its  text  :  — 

"  Et  perchS  una  delle  principali  et  piu  necessarie  considerationi  di  questo  Banco 
per  il  publico,  e  per  il  private  interesse,  e  che  li  sia  fatto  assignamento  tale,  che  non  solo 
possano  li  particolari  haver  prontamente  qualche  summa  de  denaro,  che  e  loro  bisognassc 
cavarc  alia  giornata,  ma  che  sempre,  parcsse  h  questo  Consiglio  id  vcnir  alia  estinzione  di 
detto  I'anco,  vi  siano  pronti  li  Capitali  sufficienti  per  dar  ad  ogn'  uno  il  suo  giusto  credito. 

"  I'ero  s'  intendi  fermamente  preso,  ecc. "     Lattes,  p.  189. 

2  This  explanation  is  suggested  by  Ruta,  "  Storia  delle  Banche,"  p.  114. 


THE   BANK   OF   VENICE  159 

giro  practised  by  both,  was  their  best  known  characteristic,  and 
had  also  been  the  practice  of  private  bankers  for  an  unknown  period, 
we  can  see  the  possible  growth  of  the  legend  which  finally  assigned 
to  the  Bank  of  Venice  a  life  of  about  six  centuries. 

The  history  of  the  Banco  del  Giro  from  its  establishment  in 
1619  has  never  been  written.^  Materials  for  it  exist  in  abundance 
in  jhe  Venetian  archives ;  but,  although  they  have  been  drawn 
from  by  Ferrara  and  Rezasco,  nobody  has  thought  it  worth  while 
to  follow  the  bank  carefully  through  its  vicissitudes,  and  it  is  not 
certain  that  the  gain  from  doing  so  would  be  great.  For  the 
present  purpose,  at  any  rate,  it  is  enough  to  say  that  the  republic 
did  not  find  it  easy  to  carry  on  the  business  of  the  bank  in  the 
regular  course  contemplated  by  the  law.  The  engagement  to  fill 
up  the  reserve  of  the  bank  by  monthly  payments  was,  in  effect,  an 
engagement  to  pay  off  a  public  debt  at  that  rate  from  revenue  ;  and, 
this  being  found  difficult,  fresh  creations  of  liability  put  off  the 
time  for  completing  the  payments.  In  1630  the  closing  of  the  bank 
was  determined  upon,^  and  the  raising  of  the  money  needed  for  this 
purpose  was  provided  for ;  but  some  changes  in  affairs  —  the 
effect  probably  of  the  breaking  out  of  the  war  in  Candia  in  163 1 
—  caused  this  plan  to  be  abandoned.  The  bank  kept  on  with 
varying  success  and  credit ;  and  in  1650  money  was  again  raised  to 
cover  in  part  the  public  debt  and  thus  to  place  the  establishment 
on  a  firmer  basis.  During  all  this  earlier  part  of  its  history,  how- 
ever, the  bank  probably  suffered  as  much  from  disorderly  manage- 
ment as  from  the  inability  of  the  government  to  clear  off  its  debt. 
Notwithstanding  the  elaborate  regulations  prescribed  by  law  to 
insure  against  official  malfeasance,  frequent  irregularities  and 
frauds  appear  to  have  occurred ;  and  several  revisions  of  the  regu- 
lations had  to  be  made  to  check  the  negligence  of  responsible 
officers.  In  1662  a  great  fraud  committed  by  a  bookkeeper  was 
discovered  ;  ^  and  it  is  to  this  culmination  of  evil  in  the  mana'ge- 
ment  of  the  bank  that  the  revision  of  its  regulations  in  1663  was 
due.*     The   new  code  then  published  is  filled  with  such    minute 

^  See  f    '66,  below. 

^  See  Trevisan's  "  Informazione,"  as  cited  above,  p.  297. 

^  Trevisan  says  "un  enorme  intacco."     "Informazione,"  cited  above,  p.  208. 
*  The  Ordini  e  Regole  of  1663  begin  with  this  recital  :   "  Vedendosi  da  gl'  Infedeli 
Ministri   neglette,  e    contravenuto   a   lante   sapientissime    Regole   dalla  prudenza  dell' 


l6o  ESSAYS 

provisions  against  neglect  and  misconduct,  and  contains  such  fre- 
quent references  to  abuses  and  fraud,  as  to  give  the  impression  of 
a  constant  struggle  with  unfaithful  or  dishonest  servants. 

The  eighteenth  century  saw  the  cash  office  of  the  bank  closed 
and  specie  payments  suspended,  from  171 7  to  1739,  as  a  consequence 
of  the  wars  in  which  the  decUning  republic  was  engaged  for  many 
years.  The  credit  of  the  bank  fell  during  this  period,  but  recovered 
when  the  cash  office  was  reopened  by  order  of  the  Senate  in  1739 ;  ^ 
and  thenceforward  the  commercial  writers  treat  the  bank  as  a  solid 
and  important  establishment  until  the  breaking  out  of  the  wars  of 
the  French  Revolution.  The  embarrassment  of  the  republic  by 
the  year  1797  had  led  to  such  drafts  on  the  cash  of  the  bank  that, 
with  a  deposit  of  nearly  1,500,000  ducats,  the  reserve  was  reduced 
to  a  trifle  over  522,000  ducats.^  The  bank,  however,  survived  the 
occupation  of  Venice  by  the  French ;  and  when,  under  the  treaty 
of  Campo  Formio  in  October,  1797,  the  Venetian  republic  was  ex- 
tinguished and  the  city  was  given  to  Austria,  an  effort  was  made 
to  restore  the  credit  of  the  estabUshment  by  creating  a  redemption 
fund,  fondo  di  Aiuortizasio7ie,  supported  by  a  stamp  duty  on  bills 
of  exchange,  bills  of  lading,  and  policies  of  marine  insurance,^  and 
later  by  other  revenues.  The  deficit  was  for  a  time  reduced ;  but 
the  Austrian  administration  found  its  own  wants  pressing  and  the 
coffers  of  the  bank  tempting,  and  in  1804  the  deficit  had  again 
risen,  according  to  Rezasco,  to  nearly  1,280,000  ducats.  The  Fiscal 
depiitato  al  Bancogiro  reported  at  some  length  in  January,  1805, 
upon  some  reforms  for  the  benefit  of  the  redemption  fund.  But 
the  defeat  of  the  Austrians  at  Austerlitz  and  the  treaty  of  Presburg 
in  December,  1805,  brought  Venice  under  the  French  domination; 
and  in  July,  1806,  Napoleon  issued  his  decree  for  the  liquidation 
of  the  debts  of  the  Bancogiro,  allowing  for  one-fourth  of  the  amount 
of  scrip  receivable  for  purchases  of  public  property,  and  registering 
the  other  three-fourths  in  the  public  debt  called  the  Monte  Napo- 

Eccellentiss.  Senato  fondate  per  la  huona  direttione  del  Banco  del  Giro,  anzi  con  fraude 
dannabile  dilapidati  i  Capitali  del  Banco  stesso  con  tanto  universale  gravissimo  pre- 
giudicio."     In  Marperger,  "  Beschreihung  der  Banquen,"  p.  190. 

^  For  the  decree,  see  Kota,  "  Storia  dclle  Banchc,"  p.  116. 

"^  Rezasco,  p.  83. 

3  Proclamation  by  Count  de  Walis,  imperial  commandant,  October,  1 798,  in  the 
archives  of  the  Frari  :  AfS.  copy,  received  from  Mr.  F.  R.  Grist,  late  United  States  vice- 
consul  at  Venice. 


THE    BANK   OF   VENICE  l6l 

leone.^    This  stroke,  by  a  heavy  hand,  closed  a  remarkable  chapter 
in  economic  history. 

Without  seeking  to  trace  more  minutely  the  changes  in  the 
varying  credit  of  the  bank  and  their  causes,  it  is  important  to  ob- 
serve the  effect  produced  by  the  suspensions  of  payment,  which, 
as  has  been  seen,  occurred  several  times,  beginning  with  perhaps 
more  than  one  such  period  during  the  war  of  Candia^  between 
163 1  and  1669.  In  order  to  do  this,  however,  we  must  briefly 
consider  the  nature  of  the  currency  used  by  the  bank.  The  uni- 
form statement  of  the  writers  who  at  any  period  had  occasion  to 
notice  its  currency  is,  that  the  ducat  in  which  the  bank  kept  its 
accounts  was  twenty  per  cent  higher  in  value  than  the  actual 
ducats  in  circulation,  or,  in  other  words,  that  the  bank  used  a  money 
of  account  which  bore  this  premium  when  rated  in  current  money. 
This,  for  example,  is  the  statement  made  by  Turbolo  so  early  as 
1629;^  by  Malynes  in  1656;  by  the  author  of  the  "  Discorso," 
who  wrote  near  1760;  and  by  Ricard  and  other  commercial  writers 
near  the  close  of  the  last  century.  The  ducat  banco  represented 
no  coin,  and  as  little  did  it  represent,  as  some  have  supposed,  a 
superior  value  caused  by  the  high  credit  of  the  bank.  Whatever 
the  reason  for  the  particular  ratio  selected,  the  establishment  of  a 
nominal  bank  ducat  superior  to  the  real  ducat  was  an  adminis- 
trative provision  probably  made  when  the  bank  was  opened  or 
shortly  after.*  It  was,  in  fact,  simply  the  estabUshment  of  an  im- 
aginary denomination,  for  use  in  accounting.  The  language  of  the 
"  Discorso  "  as  to  what  really  took  place  when  the  bank  was  still  in 

1  For  copies  of  the  report  of  the  Fiscal  Deputy  in  1805  and  of  Napoleon's  decree 
of  liquidation  in  1806,  the  writer  is  also  indebted  to  Mr.  F.  R.  Grist. 

2  It  is  probably  to  a  suspension  during  this  war  that  Matthew  Lewis  refers,  in  his 
pamphlet  "A  Large  Model  of  a  Bank"  (London,  1678),  when  he  says  that  in  the  late 
Turkish  wars  the  Senate  was  forced  to  expend  all  the  specie :  "  now  there  is  no  money 
at  all,  neither  is  any  money  in  specie  ever  paid  out ;  but  .  .  .  the  Fund  is  a  meer  im- 
aginary thing." 

^  Turbolo,  "  Discorsi  e  Relazione  suUe  Monete  del  Regno  di  Napoli,"  in  Custodi's 
Collection,  vol.  i.,  p.  200. 

*  Turbolo's  statement,  made  in  1629,  is  that  the  difference  of  twenty  per  cent  ex- 
isted da  molto  tempo.  Trevisan,  writing  near  the  close  of  the  same  century  and  after 
examination  of  the  documents,  says  expressly,  after  describing  the  foundation  of  the 
bank,  "  In  questo  momento  si  stabili  anche  una  moneta  propria  per  il  medesimo  banco," 
etc.  " Informazione,"  p.  296.  Malynes,  "Lex  Mercatoria"  (edition  of  1656),  describes 
(p.  257)  many  cases  of  what  he  calls  imaginary  money.  Among  them  is  the  Venetiaa 
ducat  banco.,  but  he  does  not  remark  upon  it  as  in  any  way  unusual. 
M 


l62  ESSAYS 

full  operation  leaves  no  doubt  on  the  point.  If,  says  the  writer,  a 
person  carries  1200  real  ducats,  ducati  cffetivi,  to  the  bank,  he  re- 
ceives credit  for  1000  ducats  banco  ;  and  if,  having  credit  for  1000 
ducats  banco,  he  draws  it  out,  1200  real  ducats  are  paid  to  him.^ 
The  so-called  constant  agio  of  twenty  per  cent  was  then  simply  the 
result  of  using  two  denominations  to  express  the  same  real  value, 
—  as  if  the  Bank  of  England  were  to  keep  its  accounts  in  guineas, 
which  are  worth  five  per  cent  more  than  sovereigns,  but  are  repre- 
sented by  no  actual  coin,  sovereigns  being  used  the  while  as  current 
money.  The  agio  presupposed  freedom  of  deposit  and  freedom 
of  withdrawal;  and,  such  freedom  being  maintained,  the  agio 
would  hardly  rise  and  could  not  fall.  It  would  not  rise  so  long 
as  credit  in  bank  could  be  obtained  by  depositing  coin,  and  it  could 
not  fall  so  long  as  1200  real  ducats  could  be  drawn  for  every  1000 
ducats  banco.  If  there  were  a  scarcity  of  bankable  coin,  the  ducat 
banco,  being  required  for  certain  payments,  might  conceivably  be 
"  cornered  " ;  but  this  could  not  affect  its  relation  to  coin,  and  it 
could  not  depreciate  except  in  the  case  of  suspension. 

The  1200  real  ducats  with  which  the  depositor  procured  his 
credit  for  1000  ducats  banco  were,  however,  ducats  of  lawful 
weight :  whereas  the  coin  in  actual  use  in  Venice,  as  in  the  other 
commercial  cities  of  that  age,  consisted,  to  a  great  extent,  of  pieces 
below  the  standard,  either  from  wear  or  from  illegal  practices, 
constituting  a  currency  often  much  depreciated.  The  coin  of  full 
weight  then  bore  a  variable  premium  when  exchanged  for  that  in 
ordinary  circulation ;  and  thus  we  have  what  was  called  the  S7ir- 
agio,  which  had  to  be  taken  into  account  in  reducing  bank  money 
to  everyday  cash.^  The  agio  represented  the  difference  between 
the  denominations  used  by  the  bank  and  by  the  public  in  dealing 
with  standard  money,  and  the  sur-agio  measured  the  depreciation  of 
circulating  coin  below  the  legal  standard. 

These  were  the  conditions  under  which  the  Bancogiro  carried 
on  its  operations  when  receiving,  transferring,  and  paying  out,  ac- 
cording to  the  scheme  of  its  charter.    The  execution  of  this  scheme 

*  Quarterly  Journal  of  Economics,  April,  1892,  Appendix,  p.  xviii. 

*  Thus  Kruse,  "  AUgemeiner  Contorist"  (Hamburg,  1753),  p.  174,  says  ,  "Die  Valuts 
at  entweder  Banco,  oder  Corrente,  oder  Piccoli,"  and  tiien  goes  on  to  explain  that  Banco 
bears  an  agio  of  twenty  per  cent  in  Corrente,  and  Corrente  an  agio  of  twenty-nine  per 
cent  in  Piccoli,  defining  the  three  valute  substantially  as  above. 


THE  BANK   OF   VENICE  163 

was  several  times  interrupted,  however,  as  we  have  seen,  by  suspen- 
sion of  payment.  Besides  one  or  two  earlier  suspensions  of  un- 
certain date,  1  the  bank  stopped  its  payments  in  1691  and  again  in 
171 7,  both  times  under  the  stress  of  war.  In  these  cases,  the 
Senate,  closing  the  cashier's  office,  appears  to  have  used  for  the 
public  service  the  cash  on  deposit,  and  on  the  second  occasion,  if 
not  on  the  first,  according  to  the  writer  of  the  "  Discorso,"  the 
supplies  for  the  fleet  were  paid  for  by  credits  in  bank,  which,  he 
adds,  "  is  the  same  thing  in  substance  as  giving  out  notes  instead 
of  money."  The  statements  made  as  to  the  effect  of  these  suspen- 
sions on  the  credit  of  the  bank  are  contradictory ;  but  they  may 
be  reconciled  upon  a  little  reflection  as  to  the  connection  between 
depreciation  and  over-issue. 

It  is  plain  that  a  currency  which  for  important  purposes  is  a 
legal  tender  would  not  lose  its  ease  of  circulation  by  becoming  in- 
convertible, and  might  even  be  kept  at  par  with  specie,  if  its  supply 
were  strictly  limited  to  the  demand  for  the  special  purposes  referred 
to,  as,  for  example,  in  this  case,  the  settlements  for  exchange.  In 
short,  the  good  credit  sometimes  enjoyed  by  the  bank  after  suspend- 
ing payment,  which  excited  the  wonder  of  foreign  observers,  like 
the  English  pamphleteer.  Dr.  Matthew  Lewis,  is  the  same  phe- 
nomenon which  has  been  observed  in  other  cases,  where  incon- 
vertibility has  not  been  made  the  excuse  for  over-issue.  The  notes 
of  the  Bank  of  England  did  not  seriously  depreciate  for  ten  years 
after  the  suspension  of  1797;  the  notes  of  the  suspended  banks  of 
New  York  and  New  England  did  not  fall  muc!\  below  specie  after 
the  suspension  of  1857  ;  and  the  Bank  of  France  from  1870  to  1878 
generally  kept  its  inconvertible  notes  close  to  par.  Considering 
the  difficulty  found  even  by  the  present  generation  in  comprehend- 
ing such  cases,  it  is  not  surprising  that  in  the  seventeenth  century 
the  Bank  of  Venice  should  have  seemed  to  have  in  use  an  "imagi- 
nary money,"  independent  of  any  cash  basis,  and,  nevertheless,  of 
higher  credit  than  even  coin  itself.  But  the  Venetian  Senate  was 
not  always  cautious  as  to  the  use  of  credits  in  bank,  but,  as  in  the 
case  referred  to  above,  yielded  to  the  temptation  or  necessity  of 
over-issue.     The  inevitable  result  then  followed,  —  the  ducat  banco 

^  In  Matthew  Lewis's  "Proposals  to  King  and  Parliament"  (London,  1677)  there 
is  some  account  of  a  suspension,  apparently  not  very  recent,  given  by  him  on  the  au- 
thority of  Venetian  merchants,  as  evidence  that  credit  is  better  than  cash. 


1 64  ESSAYS 

depreciated,  notwithstanding  its  use  in  settlements  for  exchange 
and  the  supposed  credit  of  the  repubUc  ^  The  evil  was  of  the 
simplest  nature  possible ;  and  the  remedy  was  as  simple.  After 
the  long  suspension  from  1717^  to  1739  the  Senate  finally,  as  an 
expedient,  "  a  togliere  ogni  alterazione  alia  partida  del  Banco,"  to 
cite  the  words  of  the  act,^  reopened  the  cash  ofifice,  and,  to  insure 
its  abiUty  to  continue  its  payments,  devoted  to  this  purpose  250,000 
ducats  then  at  the  command  of  the  government.  In  other  words, 
depreciation  was  ended  by  resuming  payment  and  restoring  the 
convertibiUty  of  the  ducat  banco.  No  fiat  of  the  Senate  had  given 
the  ducat  banco  an  invariable  value  when  the  bank  was  not  paying 
its  debts,  and  no  such  fiat  was  needed  when  these  debts,  to  use  an 
emphatic  phrase  from  our  own  legislation,  were  again  "payable 
and  paid  on  demand." 

Such  a  case  falls  strictly  into  line  then  with  what  happened  to 
the  Venetian  private  bankers  when  they  suspended  and  again  re- 
sumed, and  with  what  happens  in  the  nineteenth  century  when 
any  bank  of  issue  or  of  deposit  goes  through  the  same  changes. 
That  any  mystery  should  have  grown  up  as  to  the  amenability  of 
the  Bancogiro  to  the  recognized  laws  of  value,  is  perhaps  due  in 
part  to  the  belief  that  no  depreciation  took  place  when  the  bank 
suspended,  which  was  industriously  and  ignorantly  spread  by  some 
foreign  writers,  as  has  been  noticed  above.  In  part,  also,  the 
mystery  is  due  to  the  failure  to  comprehend  the  meaning  of  the 
agio,  in  which,  however,  the  merchant  of  the  last  century  found 
nothing  wonderful,  as  is  clear  from  the  matter-of-fact  treatment  of 
the  subject  by  the  commercial  writers.  The  meaning  of  the  agio 
is  confused  no  doubt  by  the  occasional  efforts  of  the  law  to  limit  it 
to  the  regular  rate,  and  to  prevent  speculation  at  times  when  either 
the  scarcity  of  standard  coin  or  the  suspension  of  business  at  the 

1  As  to  the  fact  of  depreciation,  Savary  may  be  cited,  "  Parfait  Negociant,"  i. 
464,  where  he  remarks  rather  contemptuously  that  little  harm  was  done,  for  those  who 
lost  confidence  could  easily  find  persons  who  would  relieve  them  by  purchasing  their 
credits  in  bank  at  ten  or  fifteen  per  cent  discount.  Cantillon,  "  Essai,"  p.  412,  appar- 
ently referring  to  the  suspension  of  1690  and  using  intelligence  obtained  from  Venice, 
speaks  of  a  depreciation  of  twenty  per  cent.  Daru,  "  Histoire  de  Venise,  iii.  135, 
says,  "  Les  valcurs  de  banque  continuerent  de  circuler  sans  defaveur."  But  Daru, 
although  he  catalogued  the  "  Discorso,"  seems  to  have  overlooked  among  other  things 
its  express  affirmation  that  the  bank  credit  fell  twenty  per  cent  in  the  Ottoman  War, 
and  that  the  condition  of  credit  was  critical. 

2  See  p.  167,  below.  '  See  Rota,  "  Storia  dellc  Banche, "  p.  Il6. 


THE   BANK    OF   VENICE  165 

cash  office  made  it  possible  to  "  corner  "  the  medium  in  which 
large  commercial  payments  had  to  be  made.  Still,  with  the  mind 
freed  from  the  notion  that  credit  can  be  worth  more  than  cash 
otherwise  than  accidentally,  —  or,  in  other  words,  that  a  promise 
is  worth  more  than  the  thing  promised,  —  the  agio  falls  into  its 
natural  place  as  the  mark  of  a  currency  which  is  below  the  stand- 
ard fixed  by  law  or  usage,  and  the  transactions  of  the  Bancogiro 
are  seen  to  exemplify  and  confirm  principles  now  recognized  as  of 
everyday  application. 

The  proper  limits  of  this  paper  do  not  permit  a  review  of  the 
daily  operations  of  the  Bancogiro,  as  described  by  the  writer  of  the 
"  Discorso."  His  account  of  the  Depositary  taking  his  place  in 
full  view  of  the  Piazzetta,  ringing  his  bell  when  the  concourse  of 
merchants  on  'change  shows  that  the  time  for  banking  has  come, 
and  setting  his  hour-glass  to  mark  the  beginning  of  the  two  stated 
hours,  the  viva  voce  dictation  of  transfers  by  depositors  so  that  the 
clerks  may  make  the  entries  in  duplicate,  the  peremptory  close  of 
transactions  at  the  sound  of  the  bell  and  the  drawing  of  the  marella, 
the  removal  of  the  books  to  the  grated  chambers,  the  careful  sepa- 
ration of  the  two  sets  of  books  and  of  clerks,  so  that  no  collusion 
may  invalidate  the  comparison  of  the  balances  when  finally  drawn 
off  in  duplicate,  the  use  of  Roman  numerals  in  some  of  the  accounts 
rather  than  Arabic, — all  this  gives  us  the  picture  of  a  leisurely, 
punctilious,  and  traditional  movement,  well  adapted  perhaps  for  a 
city  with  decUning  commerce,  but  not  for  one  in  the  hurry  and 
bustle  of  full  prosperity.  The  private  bankers,  more  ready  to 
adapt  themselves  to  the  needs  of  the  community,  had  served  their 
purpose,  but  had  paid  the  penalty  of  inexperience  in  dealing  with 
credit.  The  public  bank  had  replaced  them,  had  discarded  a  part 
of  their  functions,  and  had  reduced  the  remainder  for  safety  to  an 
inflexible  routine.  In  this  form,  however,  the  public  bank  had  no 
longer  the  power  to  adapt  itself  to  the  needs  of  commerce  in  a 
rapidly  changing  world ;  nor  was  it  saved  from  loss  of  both  cash 
and  credit  by  the  hand  of  the  government.  Even  without  the 
shock  of  the  French  Revolution,  then,  and  without  the  final  order 
for  liquidation  from  Napoleon,  it  is  not  probable  that  its  importance 
could  have  continued  long.  The  Bancogiro,  like  the  Bank  of 
Amsterdam,  could  have  found  no  place  in  the  nineteenth  century. 


1 66  ESSAYS 


Postscript 


In  the  article  on  the  origin  and  nature  of  the  Bank  of  Venice, 
the  remark  was  made  that  the  history  of  the  Bancogiro  from  its 
establishment  in  1619  has  never  been  written;  and  it  was  added 
that,  although  much  material  exists,  "  nobody  has  thought  it  worth 
while  to  follow  the  bank  carefully  through  its  vicissitudes,  and  it  is 
not  certain  that  the  gain  from  doing  so  would  be  great."  The 
writer  of  the  article  regrets  that  by  his  failure  to  observe  the  mono- 
graph //  Banco  Giro  di  Vcnczia  of  Professor  Soresina^  he  has 
done  injustice  to  a  valuable  work  and  a  meritorious  writer. 

Professor  Soresina,  in  preparation  for  his  work,  made  a  labo- 
rious examination  of  the  material  existing  in  the  Marcian  Library 
and  in  the  Archives  of  the  Frari,  and  appears  to  have  thoroughly 
explored  these  sources.  This  investigation  enabled  him  to  make 
a  careful  review  of  a  period  of  Venetian  banking  history  which 
the  present  writer  was  obhged  to  dismiss  in  two  pages,  and  to 
present  a  body  of  information  as  to  the  actual  operations  of  the 
bank  far  more  important  than  had  ever  before  been  made  public. 
The  course  of  legislation  with  respect  to  the  bank  is  followed 
closely,  some  statements  of  account  which  have  survived  are  pre- 
sented, and  several  documents  of  great  interest  are  given  in  full. 
Among  these  are  the  offer  made  by  Giovanni  Vendramin,  in  16 19, 
to  supply  the  mint  with  a  large  amount  of  silver,  which  led  to 
the  establishment  of  the  Bancogiro,  and  the  text  of  the  act  which 
closed  the  Banco  di  Rialto  in  1637. 

In  several  particulars  the  accurate  information  secured  by 
Soresina  corrects  or  explains  statements  previously  current  as  to 
the  affairs  of  the  bank,  and  particularly  with  respect  to  its  sus- 
pensions of  payment.  The  period  beginning  with  1630,  in  which 
the  bank  was  supposed  to  have  suspended  payment  perhaps  more 
than  once,  now  appears  to  have  witnessed  a  continuous  suspension 
from  1630  to  1666,  when  the  opening  of  the  cash  office  put  an  end 
to  the  forced  payment  by  transfer  of  bank  credits.  Ji"  was  to  this 
long  .suspension,  then,  that  Matthew  Lewis  referred  in  his  "  Large 
Model  of  a  Bank"  in  1678  as  the  expenditure  of  all  the  cash  in 
the  bank  "in  the  late  Turkish  wars."     The  effort  in  1630  to  take 

1  Quarterly  Journal  of  Economics,  ]7i.x\\xi.xy,  1893. 

2  Amailc-o  Soresina,  "  II  lianco  (Jiro  di  Venezia."     Venice,  1889.     8vo,  pp.  94. 


THE    BANK    OF   VENICE  167 

measures  a  saldare  ed  estingiiere  il  Banco  appears  to  have  con- 
templated, not  the  closing  of  the  bank,  but  provision  for  extin- 
guishing its  debt,  which  was  then  overwhelming.  Of  a  suspension 
of  the  bank  in  1691,  mentioned  by  McLeod  and  others,  Soresina 
gives  no  notice ;  nor  was  any  trace  found  by  Signor  Siboni  in  the 
documents  at  the  Frari.^  On  the  contrary,  the  cash  office  ap- 
pears to  have  remained  open  from  1666  to  171 3. 

The  second  long  suspension  then  began,  which  ended  with 
the  second  reopening  of  the  office  in  1739.  The  date  of  this  failure, 
which  had  been  incorrectly  given  by  the  present  writer  as  171 7, 
shows  that  the  occurrences  of  which  Cantillon  received  informa- 
tion ("  Essai  sur  le  Commerce,"  pp.  409-412)  related  to  the  second, 
and  not  to  an  earlier  suspension ;  and  the  measures  which  he 
mentions,  without  dates,  as  taken  for  the  purpose  of  raising  the 
credit  of  the  bank,  are  apparently  the  steps  taken  for  that  pur- 
pose in  1 71 8,  and  described  by  Soresina  (page  41). 

1  Giornale  degli  EconomisH,  September,  1892,  p.  292,  note. 


ACCOUNTS  OF   THE  FIRST  BANK  OF  THE   UNITED 

STATES  1 

The  first  Bank  of  the  United  States  was  obliged  by  its  charter 
to  report  its  condition  to  the  Treasury  Department  as  often  as 
required,  not  exceeding  once  a  week.  It  is  well  known  that  Mr. 
J.  J.  Knox,  when  Comptroller  of  the  Currency,  found  that  the 
existing  records  do  not  show  that  any  formal  reports  were  ever 
made.  Two  balanced  statements  were  given  to  Congress  by  Mr. 
Gallatin,  one  in  March,  1809,  and  the  other  in  January,  181 1  ;  and 
it  has  sometimes  been  assumed  that  these  were  the  only  reports 
ever  made. 

That  Mr.  Knox's  search  in  the  Treasury  Department  brought 
no  reports  to  light  proves  but  little.  The  Treasury  Department, 
it  will  be  recollected,  was  burned  when  Washington  was  occupied 
by  the  British  forces  in  August,  18 14;  and  it  was  burned  again  in 
March,  1833.  The  official  statements  made  to  Congress  as  to  the 
documents  and  books  lost  and  saved  on  these  two  occasions  raise 
a  presumption  that  any  such  reports,  if  in  existence  at  the  time  of 
either  conflagration,  would  not  have  been  among  the  papers  saved, 
the  effort  being  made  in  both  cases  to  save  primarily  what  was 
needed  for  the  current  public  service.  The  failure,  therefore,  to 
discover  at  the  present  time  a  set  of  papers,  which  even  in  18 14 
had  only  an  historical  value,  cannot  be  regarded,  under  the  cir- 
cumstances, as  having  any  weight. 

There  are,  however,  many  pieces  of  evidence  scattered  in 
the  public  documents  tending  to  show  that  the  bank  was  required 
by  the  Treasury  Department  to  make  frequent  report  of  its  con- 
dition, and  that  it  did  so  in  obedience  to  the  law. 

The  most  complete  account  which  we  have  is  that  which  was 
sent  to  the  House  in  January,  181 1,  as  above  stated,  and  is  given 
in  "  State  Papers  on  Finance,"  Vol.  II.,  page  468.  This  state- 
ment, made  in  much  detail,  is  said  by  Mr.  Gallatin  in  the  letter 

^  Quarterly  Journal  of  Economics,  July,  1892. 
168 


ACCOUNTS  OF  THE  FIRST  BANK  OF  THE  UNITED  STATES     169 

communicating  it  to  be  "  extracted  from  the  latest  returns  received 
at  this  office  from  the  bank."  It  was  then  one  of  a  series.  The 
return  of  1809  above  referred  to,  printed  ibid.,  page  352,  although 
a  balanced  account,  is  given  in  round  numbers  and  has  been  stig- 
matized as  an  account  "  trumped  up  "  ;  but  Mr.  Gallatin's  letter 
transmitting  it  states  expressly  that  the  amount  of  the  principal 
items  "  is  taken  on  a  medium,"  —  that  is,  it  is  an  averaged  account, 
and  no  more  "trumped  up  "  than  the  averaged  accounts  now  pub- 
lished weekly  by  the  clearing-house.  Mr.  Gallatin's  language 
shows  that  he  preferred  to  give  an  averaged  account,  because  it 
better  represented  the  ordinary  condition  of  the  bank  than  the 
actual  figures  at  the  date  of  his  report ;  and,  as  the  question  before 
Congress  related  to  a  renewal  of  the  charter,  it  was  the  ordinary 
condition  of  the  bank  which  Congress  most  needed  to  understand. 
For  the  present  purpose,  however,  the  important  point  is  that,  in 
making  a  statement  "  taken  on  a  medium,"  Mr.  Gallatin  probably 
had  before  him  the  various  detailed  statements  of  which  this 
medium  is  the  average.  In  one  other  instance  we  have  direct 
evidence  that  an  account  of  the  bank  was  in  possession  of  the 
government.  In  Gallatin's  "  Writings,"  Vol.  I.,  page  59,  Jeffer- 
son writes  to  Gallatin,  November  11,  1801,  giving  a  comparative 
table  of  certain  items  in  the  accounts  of  the  Bank  of  the  United 
States  and  of  banks  in  several  of  the  principal  cities.  If  we  take 
the  items  relating  to  the  Bank  of  the  United  States  and  arrange 
them  in  their  proper  form,  we  find  that  they  make  up  an  account 
as  follows  :  — 

Liabilities  Resources 

Capital, $10,000,000  Discounts,     ....     $12,150,000 

Undivided  Profits,  .     .  40,000  Six   per  cent   and  ad- 
Notes,       5,200,000  vauce  to  government,        5,460,000 

Deposits,  Due  from  banks,     .     .  1,450,000 

Government,  .     .     .  3,560,000       Specie, 5,000,000 

Individual,      .     .     .  5,240,000 


$  24,040,000  $  24,060,000 

It  is  sufficiently  evident  that  Jefferson  in  this  case  had  a  balanced 
account  of  the  bank  which  he  simplified  by  throwing  off  the  thou- 
sands, this  process  causing  the  discrepancy  which  appears  in  the 
totals  of  debit  and  credit. 


170  ESSAYS 

Besides  these  references  to  other  statements  than  those  now 
known  to  exist,  there  are  numerous  significant  allusions  to  be 
found  in  Gallatin's  correspondence  and  in  the  debates  in  Congress 
upon  the  proposed  renewal  of  the  charter.  Thus,  in  Gallatin's 
"Writings,"  Vol.  I.,  page  80,  we  have  Gallatin,  in  June,  1802, 
comparing  the  condition  of  the  Bank  of  Pennsylvania  with  that  of 
the  Bank  of  the  United  States.  To  cite  only  one  passage  from 
the  debates,  we  find  Mr.  Finley,  on  April  30,  18 10,  saying  in  the 
course  of  his  speech  that  "  the  Secretary  of  the  Treasury  has,  for 
the  time  being,  had  authority  by  law  to  inspect  the  directors  of  the 
bank,  and  did  do  it,  and  obtained  weekly  returns  of  its  situation." 
In  Gallatin's  communication  to  the  House,  January  10,  181 1,  in 
"  State  Papers  on  Finance,"  Vol.  II.,  page  460,  there  are  significant 
references  to  "  the  returns  made  to  the  Treasury,"  and  "  the  offi- 
cial statements  transmitted  in  conformity  with  .  .  .  the  charter," 
and  the  like.  And  in  Mr.  Gallatin's  well-known  "  Considerations 
on  the  Currency  and  Banking  System,"  published  in  183 1,  we  find 
him  making  a  general  statement  as  to  the  proportion  which  the 
loans  made  and  stocks  owned  by  the  bank  bore  to  its  capital  for 
the  whole  of  its  existence,  —  a  statement  which  a  man  of  his  cau- 
tion would  not  have  made  without  full  documentary  evidence.  In 
short,  there  is  ample  reason  to  believe  that,  when  the  stockholders 
declared  in  their  petition  for  a  renewal  of  the  charter,  in  April, 
1808,  "that  the  confidence  of  the  government  [was]  founded  upon 
a  constant  knowledge  of  the  interior  management  and  condition 
of  the  bank,"  they  told  the  truth.  Indeed,  it  is  inconceivable  that 
they  should  have  made  this  statement  to  a  Congress  in  which  their 
opponents  had  the  majority,  if  there  had  been  any  possibility  of  a 
denial. 

That  the  accounts  given  to  the  Treasury  Department  were  not 
made  public,  as  they  would  be  in  our  own  day,  is  not  surprising, 
when  we  see  the  different  view  then  commonly  held  as  to  giving 
publicity  to  such  statements.  For  example,  in  Jefferson  s  letter  of 
November,  1801,  referred  to  above,  it  will  be  observed  that  he 
suggests  that  statements  from  the  state  banks  should  be  general- 
ized, and  the  total  of  the  yearly  average  should  be  presented  to 
Congress.  "  It  would  give  us,"  he  says,  "the  benefit  of  their  and 
of  the  public  observations,  and  betray  no  secret  as  to  any  particu- 
lar bank."       And  it  will  be  recollected  that    at    that  period    the 


ACCOUNTS  OF  THE  FIRST  BANK  OF  THE  UNITED  STATES     1 71 

Bank  of  England,  on  which  the  Bank  of  the  United  States  was 
closely  modelled,  made  no  publication  of  its  accounts,  and  that  it 
was  not  until  1834  that  even  a  quarterly  statement  was  required  to 
be  made.  In  the  earlier  part  of  the  century  the  public  could  learn 
nothing  as  to  the  condition  of  the  bank,  except  the  selected  facts 
cautiously  given  out  in  Parliamentary  investigations.  Mr.  Tooke, 
in  his  evidence  before  the  committee  of  1832,  in  "  Parliamentary 
Documents,"  1831-1832,  Vol.  VL,  described  the  accounts  thus  given 
of  the  cash  held  by  the  bank  at  some  critical  periods  as  "  mysti- 
cal "  ;  and  some  important  witnesses,  even  in  1832,  maintained  that 
to  give  the  bank  accounts  to  the  public,  especially  to  state  the 
amount  of  buUion  held,  might  be  a  mischievous  practice.  It  is  not 
surprising,  then,  that  the  accounts  of  the  first  Bank  of  the  United 
States  down  to  181 1  were  regarded  as  confidential.  That  under 
the  seal  of  confidence  they  were  regularly  made,  from  an  early 
period  and  probably  for  the  whole  of  the  bank's  existence,  seems 
to  be  more  than  probable. 


DEPOSITS  AS  CURRENCY! 

In  the  discussions  upon  the  various  phases  of  the  currency 
question  during  the  last  twenty  years,  the  popular  dread  of  con- 
traction and  its  consequences  has  seldom  been  appealed  to  in  vain. 
Congress  has  been  a  good  index  of  public  opinion  in  this  respect, 
and  in  Congress  there  has  steadily  been  an  element  which  seemed 
to  have  grasped  the  idea  of  a  connection  between  contraction  and 
falling  prices,  as  the  one  and  sufficient  key  to  the  practical  ques- 
tions which  were  to  be  settled.  To  this  fact  were  due  the  weak 
legislation  of  1874,  to  go  back  no  farther,  and  the  necessity  in 
1875  of  so  framing  the  Resumption  Act  as  to  leave  its  meaning 
open  to  opposite  constructions  and  its  operation  uncertain  —  a 
necessity  which  Mr.  Sherman,  in  carrying  the  bill  through  the 
Senate,  did  not  seek  to  disguise.  Nothing  else  than  a  deep  con- 
viction in  Congress  that  "the  people  would  not  stand  contraction  " 
can  explain  the  fact  that  the  act  of  May  31,  1878,  "to  forbid  the 
further  retirement  of  legal  tender  notes,"  was  carried  through  the 
House  of  Representatives  under  a  suspension  of  the  rules  and 
without  a  word  of  discussion,  the  decision  of  the  question  as  to  the 
meaning  of  resumption  and  the  perpetuity  of  the  legal  tender 
issues  being  treated  as  of  less  consequence  than  the  appointment 
of  a  doorkeeper.  And,  in  the  discussions  of  the  national  banking 
system,  the  same  dread  of  contraction,  or  of  a  supposed  popular 
fear  of  contraction,  constantly  appears,  and  shapes  the  expedients 
offered  by  the  opponents,  and  sometimes  by  the  friends,  of  the 
present  system. 

This,  however,  brings  forward  in  a  convenient  form  the  ques- 
tion. What  is  the  currency  of  which  the  contraction  is  thus 
dreaded .''  In  the  resumption  discussions,  it  was  assumed  that, 
apart  from  specie,  the  legal  tender  and  bank-notes  make  up  the 
currency ;  the  amount  of  each  kind  outstanding  was  anxiously 
computed,    and    the    increase    or    diminution    of    the    aggregate 

^  Quarterly  Journal  of  Econotiiits,  ]v\\',  1887. 
172 


DEPOSITS    AS   CURRENCY 


173 


noted  as  a  decisive  fact.  And  so,  too,  in  later  discussions,  the 
sinking  of  bank-note  issues,  while  the  legal  tenders  are  constant 
in  amount,  is  often  treated  as  a  portent,  the  lesson  of  which  is 
either  the  remodelling  and  renewing  of  the  system  or  the  substitu- 
tion of  government  paper  for  bank-notes,  as  may  be  preferred. 
Without  attempting  a  formal  statement  of  the  constituents  of  the 
currency,  the  writer  wishes  to  recall  the  fact  that  there  is  a  kind 
of  bank  circulation  more  important  than  bank-notes,  and  that  the 
theorems  of  currency  cannot  be  correctly  applied  if  this  is  ignored. 

The  ease  with  which  we  ignore  deposits  as  a  part  of  the  cur- 
rency seems  the  more  remarkable,  when  we  consider  that  few  men 
in  business  fail  to  recognize  the  true  meaning  of  this  form  of  bank 
liability ;  that  it  is  a  circulating  medium  in  as  true  a  sense  and  in 
the  same  sense  as  the  bank-note,  and  that,  like  the  bank-note,  it  is 
created  by  the  bank  and  for  the  same  purposes.  McLeod's  remark, 
that  "every  bank  is  a  bank  of  issue,"  may  seem  a  hard  saying: 
still,  every  man  of  affairs  would  be  found  applying  it  in  practice 
and  recognizing  the  essential  truth  contained  in  it  in  a  tolerably 
distinct  manner ;  and  probably  one  reason  for  the  moderate  interest 
which  practical  men  are  apt  to  take  in  discussions  of  currency  is, 
that  such  discussions  so  commonly  deal  with  what  experience  shows 
to  be  only  a  part  of  the  essential  elements  of  any  actual  question. 

It  is  interesting  to  observe  that,  in  the  early  efforts  to  deal  with 
the  subject  of  credit  currency  in  this  country,  the  greatest  of  the 
financiers  on  each  side  recognized  plainly  and  constantly  the 
true  significance  of  bank  deposits.  Hamilton  at  the  start  made 
a  statement  which  could  hardly  be  improved  upon  :  — 

Every  loan  which  a  bank  makes  is,  in  its  first  shape,  a  credit  given  to  the 
borrower  in  its  books,  the  amount  of  which  it  stands  ready  to  pay,  either  in  its 
own  notes  or  in  gold  or  silver,  at  his  option.  But,  in  a  great  number  of  cases,  no 
actual  payment  is  made  in  either.  The  borrower  frequently,  by  a  check  or  order, 
transfers  his  credit  to  some  other  person,  to  whom  he  has  a  payment  to  make ; 
who,  in  his  turn,  is  as  often  content  with  a  similar  credit,  because  he  is  satisfied 
that  he  can,  whenever  he  pleases,  either  convert  it  into  cash  or  pass  it  to  some 
other  hand,  as  an  equivalent  for  it.  And  in  this  manner  the  credit  keeps  circu- 
lating, performing,  in  every  stage,  the  office  of  money,  till  it  is  extinguished  by  a 
discount  with  some  person  who  has  a  payment  to  make  to  the  bank  to  an  equal 
or  greater  amount.^ 

1  "Report  on  a  National  Bank"  (1790),  iii.  128,  of  Hamilton's  "Works"  (Lodge's 
edition). 


174 


ESSAYS 


Gallatin  was  quite  as  explicit  as  Hamilton,  stating  his  proposi- 
tion more  than  once,^  with  a  wide  interval  of  time,  substantially 
as  follows :  — 

The  bank-notes  and  the  deposits  rest  precisely  on  the  same  basis,  t  .  .  We 
can  in  no  respect  whatever  perceive  the  slightest  difference  between  the  two ;  and 
•we  cannot,  therefore,  but  consider  the  aggregate  amount  of  credits  payable  on 
demand,  standing  on  the  books  of  the  several  banks,  as  being  part  of  the  cur- 
rency of  the  United  States.  This,  it  appears  to  us,  embraces  not  only  bank- 
notes, but  all  demands  upon  banks  payable  at  sight,  and  including  their  drafts 
and  acceptances. 

These  citations,  embodying  a  principle  which  perhaps  stands 
in  little  need  of  formal  exposition,  show  plainly  enough  how  far 
much  of  our  discussion  and  even  of  our  legislation  has  drifted 
from  the  position  taken  at  the  outset.  The  current  of  our  legisla- 
tion for  years  has  not  only  treated  note  issue  as  the  subject  of 
chief  interest,  but  has  often  proceeded  on  the  theory  that  nothing 
else  need  be  considered ;  and  the  debate,  in  Congress  and  out,  has 
run  chiefly  upon  the  greenback  and  the  bank-note.  This  absorp- 
tion of  all  interest  by  the  inferior  constituent  of  our  credit  currency 
is  easily  explained.  Besides  the  apparent  ease  of  legislating  upon 
note  issues  and  the  obvious  difficulty  of  legislation  upon  deposits, 
the  notes  were,  in  the  earlier  decades  of  our  history,  the  more 
important  of  the  two.  The  comparative  sparseness  of  population 
and  the  imperfect  development  of  the  banking  habit,  in  a  new 
and  more  slowly  advancing  country  and  in  a  less  advanced  age 
than  the  present,  created  an  early  preference  for  the  currency 
which  passes  from  hand  to  hand,  and  discouraged  the  use  of  that 
which  implies  a  resort  to  the  bank.  Even  in  the  abnormal  years 
1809  and  181 1,  when  all  business  was  stagnant  as  the  result  of  the 
embargo  and  subsequent  non-intercourse,  the  note  circulation  of 
the  Bank  of  the  United  States  was  little  below  its  debt  to  indi- 
vidual depositors,  as  shown  by  the  only  statements  of  that  institu- 
tion ever  given  to  Congress ;  and,  in  the  accounts  even  of  the  best 
developed  state  banks  of  that  date,  the  notes  have  clearly  the  first 
place.  The  figures  collected  by  Gallatin  for  1820  and  1829  show 
the  same  preponderance  of  note  circulation.  The  returns  collected 
by  the  Treasury  for  many  years,  under  the  resolution  of  July,  1832, 

1  Sec  his  report  to  the  Senate  (March  3,  1809),  in  "  State  Papers,  Finance,"  ii.  351  ; 
and  his  essay  on  the  "  Currency  and  Banking  System,"  "  Writings,"  iii.  267,  268. 


DEPOSITS   AS   CURRENCY 


175 


show  that  it  was  not  until  1855  that  the  deposits  of  the  banks 
taken  in  the  aggregate  rose  above  their  circulation.  Even  under 
such  special  circumstances  as  those  of  Massachusetts,  the  notes 
continued  to  be  the  more  important  element  until  1858,  with  the 
exception  of  an  irregular  period  from  1806  to  1823,  and  two  or 
three  scattered  years  of  exceptional  conditions.^ 

And  not  only  were  the  notes  practically  the  more  important 
during  these  years,  but  events  riveted  the  attention  of  the  public 
upon  them.  The  suspension  of  specie  payments  at  the  close  of  the 
second  war  with  Great  Britain,  the  history  of  the  second  Bank  of 
the  United  States  and  the  struggle  for  its  recharter,  and  the  hard- 
money  movement  which  finally  led  to  the  independent  treasury 
system,  all  tended  to  keep  the  notes  in  the  foreground,  and  to  give 
the  impression  that  banking  is  synonymous  with  note  issue,  as  the 
old  acts  of  Parliament  treated  it.  The  long-continued  suspension 
of  1 86 1  and  the  later  controversies,  turning  primarily  on  the  ques- 
tions raised  by  the  greenbacks,  but  involving  the  bank-notes,  have 
easily  and  naturally  followed  the  same  line. 

Our  experience  resembles  that  of  other  countries  in  this  respect. 
Even  in  England,  where  modern  deposit  banking  had  its  earliest 
development  and  has  reached  its  highest  point,  and  where  for  more 
than  forty  years  legislation  has  set  the  note  circulation  apart  in 
such  a  way  as  to  bring  into  the  strongest  possible  relief  the  cur- 
rency function  of  deposits,  there  is  the  same  trouble  in  realizing  a 
patent  fact,  and,  if  we  may  trust  Bagehot,  from  the  same  cause :  — 

Probably  up  to  1830  in  England,  or  thereabouts,  the  main  profit  of  banks  was 
derived  from  the  circulation ;  and  for  many  years  after  that  the  deposits  were 
treated  as  very  minor  matters,  and  the  whole  of  so-called  banking  discussion 
turned  on  questions  of  circulation.  We  are  still  living  in  the  debris  of  that  con- 
troversy ;  for,  as  I  have  so  often  said,  people  can  hardly  think  of  the  structure  of 
Lombard  Street  except  with  reference  to  the  paper  currency  and  to  the  act  of 
1844,  which  regulates  it  now.'^ 

Even  a  writer  usually  so  much  in  sympathy  with  the  practical 
movement  of  the  times  as  Jevons,  in  his  "  Money  and  the  Mecha- 
nism of  Exchange,"  shows  a  singular  inability  to  free  himself  from 
the  old  notion  that  money  and  bank-notes  are  nearly  all  that  need 

1  See  Gallatin,   ''Writings,"  iii.  291,   296;    and  Report  of  the  Comptroller  of  the 
Currency,  1876,  pp.  38-46,  and  Appendix. 
-  "  Lombard  Street,"  p.  85. 


176  ESSAYS 

be  dealt  with  in  treating  of  currency.  The  real  importance,  how- 
ever, of  the  neglected  element  is  shown  by  the  pubHshed  returns. 
At  the  close  of  1886  the  total  note  issue  of  the  United  Kingdom, 
including  that  of  the  Banks  of  England  and  Ireland  and  of  all 
private  banks  and  joint-stock  banks,  was  slightly  over  ;^50,ooo,ooo.i 
At  nearly  the  same  date  the  deposit  accounts  of  the  joint-stock 
banks  of  the  kingdom,  nearly  all  shown  by  published  accounts, 
amounted  to  ^446,800,000,  and  the  "other  deposits  "  of  the  Bank 
of  England  to  ^29,000,000 :  so  that,  with  allowance  for  private 
banks  and  others  for  which  estimates  only  can  be  had,  it  is  prob- 
able that  there  was  an  aggregate  of  ^560,000,000  to  ;!^570,ooo,ooo.2 
The  chief  expansible  element  of  the  currency,  on  which  the  growth 
of  English  domestic  trade  and  the  adjustment  of  a  constantly 
swelHng  mass  of  transactions  have  mainly  depended,  has  been  this 
vast  system  of  transferable  credits,  which  still  waits  for  its  due 
share  of  attention  in  economic  discussion. 

England  is  still  cumbered  by  the  debris  of  the  old  controversies 
over  note  issue,  but  the  continental  countries  are  still  in  the  heat  of 
controversy  itself.  The  question  as  to  the  close  monopoly  held  by 
the  Bank  of  France  and  the  monopoly  held  by  groups  of  banks  in 
Germany  and  Italy,  together  with  the  imperfect  development  of 
what  we  have  called  the  banking  habit,  has  curiously  narrowed 
all  current  discussion  as  to  "  banks  of  issue,"  and  has  made  ques- 
tions of  banking  seem  to  turn  upon  the  kind  of  evidence  by  which 
the  existence  of  similar  debts  may  happen  to  be  certified.  The 
whole  continent  is,  in  fact,  in  much  the  same  stage  as  England  and 
the  United  States  before  1830  as  regards  practical  methods.  The 
**  account  current  "  holds  its  place  in  the  statements  of  the  conti- 
nental banks,  but  the  place  is  not  an  important  one.  The  check  has 
helped  to  introduce  the  clearing-house  ;  but  progress  is  slow,  and 
the  scale  of  operations  —  while  it  shows  a  gain  of  convenience  for 
the  banks  concerned  —  does  not  indicate  the  use  of  the  machinery 
as  a  vital  part  of  the  circulating  system  of  a  country.  Continental 
writers,  therefore,  have  naturally  done  even  less  than  English 
toward  setting  the  deposit  and  check  system  in  its  true  light.^ 

'^  Journal  of  Statistical  Society,  March,  1887,  pp.  251,  252. 
2  See  Economist,  May  21,  1887. 

'  Courtois,  who  recognizes  with  tolerable  ilistinctness  the  similarity  between  the 
issue  of  notes  and  the  opening  of  a  deposit  account,  makes  the  naive  remark :  "  On  a 


DEPOSITS   AS   CURRENCY  I// 

In  making  the  inquiry  as  to  the  share  taken  by  deposits  in 
the  active  circulation  of  the  United  States,  we  happily  have  a  good 
source  of  information  in  the  reports  of  the  Comptroller  of  the 
Currency.  These  reports  give,  with  precision,  five  times  a  year 
the  circulation  and  deposits  of  all  the  national  banks ;  and  from 
these  statements  a  sufficiently  fair  average  for  any  year  or  any  six 
months  may  be  struck.  The  tax  formerly  levied  by  the  United 
States  upon  deposits  also  brought  into  the  Treasury  returns  from 
all  banks  and  trust  companies  doing  business  under  the  laws  of 
the  several  States  and  from  private  bankers,  which  may  fairly  be 
taken  as  accurate  down  to  November,  1882,  when  the  repeal  of 
the  tax  put  an  end  to  the  series.  Since  that  date,  moreover,  the 
successive  comptrollers  have  obtained  from  official  sources  such 
information  as  could  be  had  respecting  state  banks  and  trust  com- 
panies ;  and  this,  although  imperfect  and  not  given  for  uniform 
dates,  is  an  approximation  to  the  actual  movement  down  to  the 
present  time.  Of  the  reported  deposits  of  trust  companies  only  a 
small  proportion  represent  the  trusts  held  by  these  companies  ;  but 
by  far  the  greater  part  belongs  to  the  banking  business,  which  is 
their  chief  function.  And,  although  the  action  of  parts  of  their 
deposit  accounts  may  be  sluggish  from  their  methods  of  deahng 
with  customers,  —  as  is  also  true  in  some  degree  of  any  bank, 
national  or  state,  —  it  seems  not  unfair  on  the  whole  to  let  these 
deposits  stand  on  the  same  footing  as  those  of  the  ordinary  banks, 
especially  in  view  of  the  probability  that  the  figures  are  within 
rather  than  beyond  the  truth.  Unfortunately,  there  are  no  longer 
the  means  of  determining  the  amount  of  the  deposits  with  private 
banks  and  bankers;  it  was  probably  not  overstated  before  1883, 
and  it  can  only  be  said  that  the  amount,  if  it  could  be  known,  would 
probably  show  that  the  increase  observed  down  to  that  date  has 
continued  since.  Taking  then,  for  comparison,  the  six  months' 
averages  which  the  Comptroller's  reports  give  for  the  banks  other 


cree  un  concurrent  au  billet  de  banque,  il  est  vrai,  mais  un  concurrent  bien  faible ;  quel 
stimulant  a  deposer  des  especes  en  compte  courant  h  la  Banque,  si  on  ne  vous  sert  aucun 
interSt  ?  "  "  Histoire  des  Banques  en  France,"  p.  241.  Wagner,  in  his  article  in  Schon- 
berg's  "  Handbuch  "  on  "  Credit  und  Bankwesen,"  has  some  important  remarks  on  the 
origin  of  "  book-credit  deposits  "  and  their  use  as  a  real  substitute  for  notes.  See  §§  54- 
57.  Knies,  in  "Geld  und  Credit,"  fails  to  reach  any  clear  conception  of  the  function 
of  deposits. 


1/8 


ESSAYS 


than  national,  the  figures  from  these  sources  may  be  grouped  as 
shown  in  the  following  table  :  — 

[In  dollars,  000,000  omitted.] 


Average  for  6  months  ending 
November  30,  1875 
May  31,  1876 
May  31,  1877 

May  31,  1878 
May  31,  1879  . 
May  31,  1880 
May  31,  1881 
May  31,  1882 
November  30,  1882 
For  year  1883     .     . 

1884  .... 

1885  .... 
1886 

Amount  on  March  3,  1887 


Notes 


Nat. 
Banks 


308 

301 

304 
321 

309 
321 
312 

311 

292 
271 
242 
186 


Deposits 


Nat. 
Banks 


675 
617 
640 

611 
614 

799 
989 
1,047 
1,095 
1,054 
1,010 
1,071 
1,146 
1,225 


State 
Banks 


Trust 
Cos. 


487 
480 


230 

257 

319 
386 

452 
490 


335 
325 
344 
343 


165 
189 
188 
214 


Priv. 
Bankers 


140 

183 

242 
296 
289 

? 

? 

? 

? 


Aggre- 
gate 


1,162 
1,097 
I, III 

1,025 
1,011 
1,301 
1,617 

1,795 
1,874 

[1554] 
[1524] 
[1603] 

[1703] 


There  can  be  little  doubt,  then,  that  in  1886  the  aggregate 
deposits  of  banks  and  bankers  in  the  United  States,  savings  banks 
being  of  course  excluded,  were  on  the  average  above  two  thousand 
millions ;  and  there  may  be  said  to  be  a  high  degree  of  probability 
that  at  the  present  time  the  aggregate  stands  at  nearly  double  the 
amount  which  was  returned  for  1875.  The  increase  has  not  been 
without  interruption.  The  total  has  fallen  in  periods  of  depres- 
sion, and  it  has  risen  with  regaining  confidence.  Indeed,  the 
changes  in  the  business  situation  of  the  country,  acting  through 
the  demands  of  persons  dealing  with  the  banks,  of  necessity 
leave  at  this  point  a  permanent  record  of  their  passage.  But 
the  fact  which  it  is  chiefly  desired  to  emphasize  here  is  the  com- 
plete elasticity  of  this  section  of  our  currency.  It  adapts  itself  to 
the  demand  of  the  moment  without  visible  effort  and  either  by 
expansion  or  contraction,  as  the  case  may  be ;  and  it  does  this 
quite  irrespective  of  legislative  purpose  or  guidance.     From  the 


DEPOSITS   AS   CURRENCY  1 79 

figures,  indeed,  the  conclusion  is  irresistible  that,  if  for  any  reason 
the  creation  of  deposit  currency  through  the  agency  of  the  national 
banks  is  hindered  or  limited,  it  will  make  its  growth  by  means  of 
state  banks ;  and,  if  not  by  these,  then  by  a  system  of  private 
banking,  which  no  legislation  can  touch,  until  the  government 
shall  assume  the  power  of  declaring  whether  A  may  owe  B  or  not. 
The  growth  of  this  kind  of  credit  may  be  guided  and  it  may  be 
made  more  or  less  sound  according  to  the  wisdom  of  legislation. 
The  stability  of  the  standard  to  which  its  value  relates  is  wholly 
within  legislative  control,  and  the  continuity  of  the  test  of  its  sol- 
vency by  reference  to  that  standard  is  within  the  scope  of  legisla- 
tive influence.  But,  whether  the  legislation  be  good  or  bad,  here 
is  the  adjustable  part  of  our  system  of  credit  currency,  and  the 
part  of  it  which  will  continue  to  adjust  itself  to  the  scale  of  the 
transactions  to  which  current  business  naturally  gives  rise. 

In  view  of  the  extraordinary  growth  of  this  kind  of  credit 
currency,  the  mere  question  of  the  amount  of  national  bank-notes 
in  circulation  sinks  into  insignificance,  and  with  it  the  question 
whether  their  place  must  be  made  good  by  other  descriptions  of 
paper,  as,  for  example,  by  greenbacks.  There  is  a  real  question 
as  to  the  convenience  of  using  coin,  in  place  of  a  part  of  the  paper 
which  the  community  uses  in  its  small  transactions ;  there  is  a 
question  as  to  the  wisdom  of  depriving  a  great  system  of  banks  of 
the  ability  to  supply  whichever  form  of  credit  may  be  required  by 
the  public  ;  and  there  is  a  grave  question  as  to  having  any  larger 
part  of  our  credit  currency,  or  any  part  of  it,  subject  to  control 
as  regards  its  amount,  by  any  legislative  body  whatever.  But  as 
regards  the  mere  question  of  contraction,  still  sometimes  brought 
forward  with  respect  to  the  paper  currency,  the  grounds  for  it 
have  ceased  to  exist.  For,  besides  the  fact  that  since  resumption 
specie  has  come  in  and  must  continue  to  come,  through  an  ever 
open  door,  to  make  good  any  deficiency  of  circulating  medium,  the 
growth  of  deposits  has  covered  many  times  over  all  loss  in  the 
amount  of  paper  circulation.  In  fact,  as  soon  as  specie  payments 
were  firmly  established  and  the  value  of  credit  currency  was  set- 
tled, by  its  assured  conversion  at  pleasure  into  a  solid  medium,  con- 
traction ceased  to  be  any  proper  object  of  dread.  Indeed,  we  may 
go  farther,  and  say  that  if  the  United  States  government  were  to 
pay  off  every  legal  tender  note,  and  if  every  bank-note  were  to 


l8o  ESSAYS 

be  withdrawn,  these  changes  would  produce  no  real  contraction  of 
the  currency.  With  specie  thus  brought  into  common  use  for 
smaller  and  everyday  transactions,  we  should,  it  is  true,  have  a 
currency  far  less  convenient  for  its  minor  uses,  and  we  should 
no  doubt  see  the  use  of  the  deposit  and  check  system  thus  carried 
prematurely  into  classes  of  transactions  and  into  sections  of  coun- 
try where  the  note  now  meets  a  popular  demand  ;  but,  as  regards 
the  mass  of  exchanges  from  which  the  business  condition  of  the 
country  at  any  given  time  takes  its  tone,  we  should  find  chem  car- 
ried on  as  now,  by  a  creation  of  bank  credits  on  whatever  scale 
the  needs  of  the  time  might  require. 

Upon  this  point  sufficient  evidence  is  presented  by  the  opera- 
tions of  the  national  banks  since  the  resumption  of  specie  pay- 
ment. Of  these  operations,  the  great  results  are  clearly  shown 
in  the  diagram  issued  with  the  comptroller's  report  for  1886. 
Inspection  of  this  diagram  shows  an  enormous  expansion  of  the 
general  scale  of  transactions  by  the  banks  since  1879.  This  ex- 
pansion has  come  only  in  a  moderate  degree  from  the  applica- 
tion of  new  banking  capital ;  it  has  come  in  spite  of  the  sinking 
of  the  line  which  describes  the  changes  in  circulation,  and  chiefly 
from  the  sharp  rise  of  the  line  of  deposits  during  the  flush  period 
from  April,  1879,  to  December,  1881,  and  again  from  the  fall  of 
1884  to  the  present  time.  The  elastic  power  of  the  deposit  cur- 
rency, and  the  certainty  with  which  it  iills  the  void  left  by  the 
disappearance  of  paper,  could  not  be  illustrated  better  than  by  the 
soaring  of  the  red  line  as  the  black  one  sinks,  upon  Mr.  Tren- 
holm's  chart. 

The  legitimate  inference  from  these  considerations  is  not,  how- 
ever, that  the  disappearance  of  the  bank-note,  or  the  substitution 
of  government  paper  for  it,  is  to  be  viewed  with  indifference. 
The  business  of  a  country  in  which  the  banking  habit  is  firmly 
seated  will,  it  is  true,  find  a  medium  of  exchange,  and  in  the 
amount  needed  ;  but  it  is  of  great  consequence  that  the  medium 
used  should  be  made  up  of  the  kinds  most  convenient  for  the  use 
of  the  community,  and  divided  between  those  kinds  in  the  pro- 
portions most  convenient.  This  question  of  proportion  is  one 
which  no  combination  of  counsellors,  public  or  private,  can  deter- 
mine.    No  legislature    and   no  conclave  of  bankers  can  say  that 


DEPOSITS   AS   CURRENCY  l8l 

the  people  of  the  United  States  require  any  given  amount  of  notes 
for  the  management  of  their  exchanges.  The  amount  which  is 
sufficient  this  year  may,  and  almost  certainly  will,  be  either  insuf- 
ficient or  in  excess  the  next ;  and  it  is  partly  from  a  sense  of  the 
absolute  inability  of  any  human  foresight  to  deal  with  this  prob- 
lem, that  we  owe  the  multitude  of  schemes  proposed  in  years  past 
"  to  adapt  the  amount  of  the  [paper]  currency  to  the  needs  of 
the  country."  ^ 

Left  to  itself,  the  country  settles  this  problem  of  proportion 
in  a  natural  way,  by  the  demand  which  each  individual  using  a 
credit  currency  of  any  kind  will  make  for  notes  or  for  a  deposit 
account,  as  his  special  conditions  may  require.  But,  in  order  that 
this  natural  process  should  go  on  easily  and  without  inconvenience 
to  the  community,  it  is  requisite  that  the  banks  or  bankers  with 
whom  individuals  deal  when  obtaining  loans  or  receiving  payments 
should  have  the  ability  to  respond  to  demand  in  either  form  ;  in 
other  words,  that  the  creditor  of  the  bank  or  banker  should  be 
able  to  receive  the  evidence  of  his  claim  in  the  one  form,  if  he 
expects  to  use  it  in  large  operations  or  in  a  closely  settled  com- 
munity, or  in  the  other,  if  in  small  operations  or  where  hand-to- 
hand  dealings  are  the  rule,  and  that  the  lender  should  find  his 
profit  equally  in  responding  to  either  demand.  It  is  only  by 
being  allowed  to  take  one  or  the  other  form,  as  occasion  requires, 
that  a  given  mass  of  bank  credit  can  perform  its  functions  with 
the  maximum  of  public  advantage.  There  may  be  sound  reasons 
of  a  different  order  for  not  giving  the  power  of  issue  in  both  forms 
to  every  company  or  individual  carrying  on  the  business  of  bank- 
ing ;  in  other  words,  the  ideal  of  a  perfectly  free  system  of 
banking  is  no  doubt  beyond  reach  ;  but  that,  for  the  greatest 
advantage  of  the  public,  the  issue  of  notes  by  banks  should  be 
widely  enough  diffused  to  present  in  every  considerable  district 
which  uses  banking  facilities  at  all  the  easy  choice  between  the 
two  methods  of  using  credit,  seems  to  be  beyond  dispute.  This 
choice  is  given  only  when  the  power  of  issue  is  substantially  in 

1  It  is  true  that  there  is  a  party  who  believe  that  the  issue  of  notes  for  the  country 
should  be  fixed  and  "  have  no  elastic  power."  See  Mr.  Buckner's  speech  in  the  House 
on  the  extension  of  bank  charters,  April  17,  1882.  And  a  Secretary  of  the  Treasury  once 
committed  himself  to  the  astonishing  proposition,  that  the  issue  of  bank-notes  ought  to 
be  fixed  in  amount  and  the  issue  of  legal  tenders  adjustable  by  the  Treasury,  according 
to  its  conception  of  the  needs  of  the  time.     See  Finance  Report,  1872,  p.  xx. 


1 82  ESSAYS 

the  same  hands  which  control  the  loans  and  the  business  of  bank- 
ing generally.  It  is,  in  fact,  one  of  the  great  services  rendered 
by  the  national  banking  system  that,  for  a  most  critical  quarter 
century,  it  carried  note  issue  and  deposit  banking  side  by  side 
throughout  the  greater  part  of  the  country,  under  the  manage- 
ment of  a  class  of  remarkably  sound  institutions,  giving  to  the 
community  many  of  the  benefits  of  free  banking  with  the  mini- 
mum of  its  risks.  As  a  substitute  for  this  system,  the  issue  of 
notes  by  the  Treasury  is  as  little  to  the  purpose  as  the  striking  of 
coins'  by  the  mint ;  nor  is  there  any  machinery  by  which  the  oper- 
ations of  the  Treasury  can  be  made  to  perform  the  desired  office. 
Happily,  those  operations  are  quite  distinct  from  the  commercial 
movement  of  the  country,  and  are  unsuited  by  their  nature  for 
any  closer  connection  with  it,  even  if  such  connection  were  expe- 
dient. 

To  the  firm  establishment  of  the  right  of  note  issue  as  a  prac- 
tical alternative  given  to  the  banking  system  of  the  country,  it  is 
doubtful  whether  any  serious  opposition  would  have  arisen  had 
there  not  been  an  impression  that  in  some  way  this  right  is  the 
opportunity,  either  for  an  exorbitant  profit  or,  at  any  rate,  for  a 
profit  which  should  be  reaped  by  the  government.  As  regards 
the  amount  of  the  profit  coming  from  circulation,  no  real  answer 
has  ever  been  made  to  the  computations  by  which  the  late  Comp- 
troller repeatedly  demonstrated  in  his  reports  the  trifling  margin 
of  gain  left  by  the  use  of  credit  in  this  form.  Whatever  may 
have  been  the  profits  of  banks  from  this  source  fifteen  years  ago, 
with  the  rates  of  interest  then  prevailing,  there  is  no  doubt  as  to 
the  comparative  unimportance  to-day  of  using  their  credit  in  a 
form  which  requires  as  a  preliminary  the  investment  of  capital 
at  the  rate  of  two  and  one-half  per  cent.  Indeed,  the  figures  show 
that,  by  jealously  maintaining  the  primitive  forms  of  the  national 
system  under  altered  conditions,  note  circulation  has  long  been 
systematically  discouraged  and  its  essential  advantages  for  the 
public  sacrificed. 

To  every  practical  demonstration  of  the  narrow  margin  of 
profit,  however,  the  common  reply  is,  after  all,  a  more  or  less  open 
appeal  to  the  theory  of  a  supposed  double  source  of  profit  under 
a  secured  issue  —  a  theory  which  has  had  a  strong  hold  on  the 
public,  and  has  not  always  been  met  with  complete  perception  of 


DEPOSITS   AS   CURRENCY  183 

its  hollowness,  even  by  the  friends  of  the  national  system.  For 
the  present  purpose  it  is  enough  to  point  out  that  the  source  of 
profit  for  any  bank  is  the  investments  in  securities  or  loans  which 
it  can  hold,  by  the  use  of  its  capital,  together  with  its  credit  in  any 
form ;  that  its  profit  is  not  increased  by  pledging  any  part  of  the 
investment  to  secure  any  class  of  liabilities  ;  and  that,  therefore, 
the  sources  of  profit  open  to  national  banks  issuing  notes  are  of 
precisely  the  same  order  as  those  enjoyed  by  state  banks  and 
private  bankers.  The  national  bank  has  the  great  advantage  of 
a  choice  between  methods  of  using  its  credit ;  but,  however  its 
choice  is  made,  its  investment  is  necessarily  measured  by  its  capi- 
tal phis  its  credit,  which  is  also  the  measure  for  its  non-issuing 
neighbors.  The  confinement  of  the  national  banks  therefore  to 
the  use  of  credit  in  one  form,  instead  of  giving  them  an  alternative 
between  two,  would  not  cut  off  a  double  profit  now  enjoyed,  but 
would  merely  require  that  the  credit  by  which  a  part  of  their 
profit  is  earned  should  be  evidenced  by  book  account,  and  not  by 
demand  note,  or  vice  versa.  In  short,  the  profits  of  the  banks  are 
increased  by  the  right  of  issue  only  so  far  as  that  right  makes  it 
possible  to  extend  the  credit  of  the  banks,  and  so  to  increase  their 
holding  of  investments,  beyond  the  point  which  they  could  reach 
by  the  use  of  the  deposit  system  alone.  But  the  swift  extension  of 
deposits  already  pointed  out  makes  it  extremely  doubtful  whether 
the  extinction  of  the  note  issues  would  now  have  any  serious  ef- 
fect on  the  total  amount  of  bank  credit  used  or  any  practical  result 
other  than  a  certain  inconvenience  to  the  public.  Barring  the 
effect  on  some  of  the  smaller  interior  banks,  the  probability  is 
that  the  national  banks  in  the  aggregate  would,  even  without  the 
right  of  issuing  notes,  continue  to  expand  their  business  and  to 
earn  such  dividends  as  the  current  rate  of  interest  would  have 
allowed  in  any  case.  This  is  the  natural  inference  from  the  fact, 
already  noted,  that  hitherto  the  displacement  of  their  notes  has 
been  far  more  than  made  good  by  the  increase  of  deposit  accounts. 
That  the  government  makes  a  saving  by  the  issue  of  its  own 
notes,  so  far  as  these  are  the  substitute  for  an  interest-bearing  debt, 
and  that  it  might  make  a  still  larger  saving  by  occupying  the  whole 
field  of  paper  circulation,  is  an  independent  consideration.  It  is, 
however,  plainly  a  consideration  of  very  little  practical  value,  when 
we  take  into  account  the  ease  with  which  ordinary  sources  of  in- 


l84  ESSAYS 

come  enable  the  government  to  reduce  its  debt  as  well  as  meet  its 
expenditure,  and  the  fact  that  the  disposition  of  a  surplus  revenue 
has  been  so  far  an  insoluble  problem.  Obviously,  the  government 
of  the  United  States  can  afford  to  settle  the  currency  of  the  coun- 
try upon  whatever  basis  is  found  to  be  for  the  convenience  and  ad- 
vantage of  the  public,  without  being  diverted  from  this  aim  by  any 
necessity  for  securing  a  certain  number  of  millions.  It  is  conceiv- 
able that  other  functions  now  left  to  private  enterprise  might  at  a 
pinch  be  assumed  by  the  Treasury  and  made  to  produce  a  revenue  ; 
but  few  persons  would  pretend  that  there  is  any  fiscal  reason  which 
could  be  of  weight  in  favor  of  such  an  assumption,  if  it  appears 
that  the  general  interest  is  in  any  way  promoted  by  leaving  the 
service  to  individuals.  Economy  at  any  cost  is  not  our  rule  in 
dealing  with  other  subjects,  and  there  is  no  reason  why  it  should 
be  a  controlling  consideration  in  the  regulation  of  any  part  of  our 
currency. 

Assuming,  then,  that  the  profits  of  note  circulation  are  but  the 
ordinary  profits  of  bank  credit,  such  as  will  be  earned  under  what- 
ever system  may  finally  prevail,  and  assuming  also  that  the  govern- 
ment can  afford  to  forego  the  use  of  its  credit  in  the  form  of  notes, 
and  to  allow  the  banks  to  continue  and  extend  the  use  of  theirs,  the 
question  as  to  our  banking  system  resolves  itself  into  the  inquiry, 
whether  it  is  for  the  interest  of  the  public  to  keep  deposit  bank- 
ing as  far  as  possible  under  the  national  system,  or  to  allow  it  to 
drift  more  and  more  into  the  possession  of  state  banks  or  into  pri- 
vate hands.  The  optional  use  of  the  right  of  circulation  being  re- 
moved, not  much  is  required,  it  would  seem,  to  turn  the  scale  as 
between  a  national  charter,  on  the  one  hand,  with  its  numerous 
safeguards  and  its  strict  public  supervision,  and  a  state  charter,  on 
the  other,  with  its  frequent  absence  of  all  limitations  —  to  say 
nothing  of  the  complete  Hcense  of  private  banking.  The  fact  of 
the  existence  of  nine  hundred  state  banks  and  of  thirty-six  hundred 
private  banking-houses  is  evidence  on  this  point.  "  It  is  doubtful," 
says  Mr.  Trenholm,  "  whether  the  banks  would  find  sufficient  in- 
ducement to  remain  in  the  system  without  enjoying  some  privileges 
as  to  the  issue  of  currency." 

The  doubt  whether  there  is  power  under  the  Constitution  to 
charter  banks  except  in  connection  with  an  issue  of  notes  may 
probably  be  dismissed  ;  but  not  so  the  doubt  whether  banks  would 


DEPOSITS   AS    CURRENCY  1 85 

care  to  hold  national  charters  if  the  power  of  note-issue  were  with- 
drawn. For  here  the  comparative  soundness  and  safety  of  the 
whole  of  our  credit  currency  come  into  question,  and  we  have  to 
ask,  What  is  the  safest  system  for  its  more  important  as  well  as  its 
minor  element  ?  If  there  is  reason  for  demanding  that  the  cur- 
rency used  in  the  small  transactions  of  the  community  shall  be 
secure,  there  is  also  reason  for  requiring  that  the  greater  currency 
used  in  large  transactions  shall  be  secure.  That  complete  super- 
vision of  the  latter  is  impossible  from  the  nature  of  the  case  does 
not  affect  the  result :  it  is  still  for  the  advantage  of  all  that  as 
large  a  proportion  as  possible  of  the  sources  of  our  real  currency 
should  be  kept  under  that  organization  which  practically  is  found 
to  insure  the  best  oversight  and  the  safest  management.  There  is 
no  doubt  as  to  which  organization  that  is.  The  conclusion  seems, 
then,  to  be  irresistible  that,  if  the  national  system  can  retain  its 
control  over  twelve  hundred  millions  of  deposits,  as  the  figures  now 
stand,  and  perhaps  extend  its  control  over  a  part  of  the  eight  or 
ten  hundred  millions  held  elsewhere,  the  community  would  buy 
this  result  cheaply  by  allowing  the  issue  of  such  proportion  of 
bank-notes  as  this  mass  of  business  would  imply.  The  risk  of 
inflation  from  overissue  would  not  be  a  serious  element  in  the  ac- 
count. It  would  not  be  appreciably  greater  than  at  present ;  for, 
after  all,  inflation  is  as  easy  and,  under  favoring  conditions,  occurs 
as  surely  with  a  system  of  pure  deposit  as  with  a  note  system,  as 
the  operations  of  our  own  banks  in  any  period  of  excitement  may 
testify.  And,  in  any  case,  the  security  against  the  consequences 
of  inflation  is  not  to  be  found  in  the  limitation  or  extinction  of 
notes,  but  in  specie  redemption  for  all  liabilities,  and  in  the  encour- 
agement given  to  sound  banking  by  steady  oversight  and  pub- 
licity. Such  security,  it  may  be  presumed,  we  shall  continue  to 
have  under  the  national  system  in  as  great  a  measure  as  at 
present. 

The  kernel  of  the  banking  question  for  the  United  States,  then, 
as  it  seems  to  the  writer,  is  to  be  found  in  the  future  of  the  deposit 
system.  If  this  is  settled  upon  the  best  plan  practicable,  the  sub- 
stance of  the  question  will  have  been  disposed  of ;  and,  for  the 
purpose  of  such  settlement,  the  continuance  or  perhaps  it  should 
be  said  the  revival,  of  the  right  of  issue  might  well  be  allowed  as  a 
makeweight.     It  is  not  within  the  scope  of  this  paper  to  discuss 


1 86  ESSAYS 

the  various  propositions  for  meeting  the  practical  difficulty  arising 
from  the  extinction  of  the  national  debt.  It  may  be  said  of  these 
propositions  in  general,  however,  that  they  are  expedients  for  pro- 
longing the  existence  of  the  national  bank-note  issue  for  such  time 
as  any  part  of  the  national  debt  may  remain  unpaid,  postponing 
the  main  question,  which  must  present  itself  with  the  disappear- 
ance of  the  debt.  In  this  part  of  the  discussion,  as  in  others,  the 
impression  created  by  the  success  with  which  the  present  secured 
circulation  has  worked  is  so  great,  that  it  is  hard  to  bear  in  mind 
that,  after  all,  the  kind  of  security  held  is  not  of  the  essence  of  the 
system.  Evidently,  the  fundamental  point  is  that  the  notes  shall 
be  secured  by  a  preferred  claim  upon  some  sufficient  portion  of  the 
property  of  the  issuing  bank.  This  portion  of  property,  now  re- 
quired to  consist  of  United  States  bonds,  may,  however,  equally 
well  consist  of  other  securities  of  assured  value.  It  is,  indeed,  en- 
tirely conceivable,  so  far  as  the  principle  of  the  system  is  concerned, 
that  here,  as  in  Germany,  a  solid  circulation  might  be  issued,  of 
which  the  basis  should  be  those  general  securities  and  commercial 
obligations  of  short  date,  which  are  found  sufficient  to  guard  the 
credit  of  a  bank  with  its  own  customers  and  the  public.  In  short, 
if  we  once  recognize  the  fact  that  the  particular  set  of  details 
which  have  marked  our  system  so  far  are  obsolescent,  the  market 
is  not  without  securities  and  the  world  is  not  without  examples,  on 
which  a  substituted  system  of  circulation  could  be  safely  estab- 
lished. 

It  would  no  doubt  be  difficult  to  arrange  a  plan  for  securing 
notes  as  simple  and  perfect  in  its  operation  as  that  which  the 
existence  of  a  great  public  debt  has  given  us  the  enjoyment  of 
since  the  Civil  War ;  but  the  actual  difference  to  the  public,  if  a  new 
basis  of  security  were  to  be  sought,  would  probably  not  be  appre- 
ciable. We  are  apt  to  underrate  the  extent  to  which  the  liabili- 
ties of  the  national  banks  are  protected  by  the  general  safeguards 
of  the  system,  as  distinguished  from  the  specific  pledge  of  securities. 
The  deposit  accounts  of  these  banks,  however,  arc  secured  only  by 
the  strength  of  the  motives  which  usually  prompt  directors  to 
prefer  good  investments  to  bad.  And  it  appears  that,  with  an 
average  of  such  deposits  of  over  one  thousand  millions  for  the  last 
five  years,  the  loss  to  depositors  has  been  less  than  one-fifth  of 
one  per  cent,  not  of   the    movement,   but  of   the  average  hold- 


DEPOSITS   AS   CURRENCY  18/ 

ing.^  A  loss,  then,  which  is  hardly  greater  than  the  mere  unnoticed 
abrasion  of  some  large  classes  of  coin  circulation,  measures  the 
risk  in  practice  of  what  would  be  called  an  entirely  uncovered 
liability,  under  a  well-organized  system  like  the  present.  It  is  to 
the  reduction  of  a  fractional  loss  like  this  upon  the  note  circulation 
that  the  machinery  of  any  system  of  pledged  securities  is  directed. 
To  find  a  working  plan  which  can  be  used  with  practical  safety 
within  such  limits  cannot  be  a  hard  task  for  legislative  ingenuity. 

^  Down  to  September,  1886,  the  proved  claims  against  insolvent  national  banks 
since  1863  amounted  to  $44,236,247,  on  which  $22,508,900  had  been  paid.  The  last 
five  years  of  the  period  were  the  worst,  including  the  heavy  failures  of  the  Mechanics' 
National  Bank  of  Newark,  the  Pacific  of  Boston,  the  Marine  of  New  York,  and  the 
Exchange  of  Norfolk,  which  amounted  to  more  than  $12,500,000.  For  the  five  years 
the  proved  liabilities  of  insolvent  banks,  including  these  four,  were  $17,047,245,  on  which 
$7,343,000  has  been  paid.  The  average  loss  of  the  five  worst  years,  then,  has  been  less 
than  $2,000,000,  or  less  than  one-fifth  of  one  per  cent  of  the  deposits. 


THE  BANK-NOTE   QUESTION  i 

The  question  as  to  the  continued  existence  of  bank-notes  as  a 
part  of  the  currency  of  the  United  States  has  recently  entered 
upon  a  new  phase.  For  several  years  past  the  majority  of  our 
people  and  of  their  political  representatives  have  observed  with 
great  equanimity  the  gradual  disappearance  of  national-bank  notes, 
and  the  approach  to  the  point  where  the  trifling  profits  upon  circu- 
lation and  the  extinction  of  the  national  bonded  debt  would  leave 
no  paper  in  use  except  the  notes  and  coin  certificates  of  the  United 
States.  This  surrender  of  the  whole  field  to  government  paper, 
the  result  of  circumstances,  but  not  designed  by  law,  has  been 
defended,  moreover,  on  the  ground  that  the  national  Treasury 
ought  to  receive  whatever  profits  or  convenience  may  be  secured 
from  the  issue  of  credit  as  a  substitute  for  money,  and  that  the 
right  of  issue  granted  to  corporations  of  any  class  is  an  unreason- 
able addition  to  their  many  privileges.  We  now  have  the  propo- 
sition repeatedly  brought  forward  in  Congress,  discussed  and 
supported  in  the  public  press,  and  embodied  in  the  platform  of  one 
of  the  great  political  parties,  to  repeal  the  tax  of  ten  per  cent  on 
the  notes  of  banks  and  bankers  carrying  on  business  under  the 
laws  of  the  several  states,  and  thus  to  admit  to  the  field  of  circula- 
tion the  issues  of  a  vast  number  and  variety  of  local  institutions, 
which  have  been  excluded  therefrom  by  the  practice  of  the  last 
twenty-five  years.  In  short,  the  present  form  of  the  bank-note 
question  appears  to  be,  not  whether  the  whole  right  of  issue  shall 
lapse  into  the  hands  of  the  national  government,  but  whether  that 
right  may  not  advantageously  be  extended  to  everybody  whose 
exercise  of  it  is  admitted  by  the  varying  policy  of  forty-four  local 
legislatures.^ 

1  Quarterly  Journal  of  Economics,  October,  1892. 

2  Dills  for  aholishinfT  the  tax  on  notes  of  state  banks,  or  for  equalizing  taxation  on 
the  notes  of  national  banks  and  of  state  banks,  have  been  introduced  :  — 

188 


THE   BANK-NOTE   QUESTION 


189 


A  sudden  change  of  ground  like  this,  involving  a  proposed 
revolution  in  our  system  of  paper  currency  and  in  much  besides, 
may  betoken  a  decisive  and  durable  alteration  in  the  lines  on  which 
the  bank-note  question  is  to  be  discussed  hereafter ;  or  it  may  only 
be  one  more  instance  of  the  facihty  with  which  large  numbers  of 
our  people  are  ready  for  a  brief  space  to  seize  upon  the  last  new 
idea,  —  especially  in  matters  of  finance.  That  the  idea  is  now  to 
be  found  in  a  political  platform,  we  are  warranted  in  saying,  proves 
nothing,  except  that  in  the  judgment  of  some  persons  it  has  a 
present  hold  upon  some  important  classes  or  sections,  and  is  likely 
to  retain  that  hold  until  November.  But,  whether  durable  or  tran- 
sient, the  change  of  ground  is  too  important  to  be  neglected.  In 
either  case,  it  probably  has  its  origin  in  real  wants  felt  keenly  in 
some  parts  of  the  country,  though  perhaps  misunderstood.  And 
in  either  case  it  is  interesting  to  inquire  whether  the  remedy  pro- 
posed is  safe  and  appropriate  to  those  wants. 

The  legislation  under  which  banks  are  now  organized  under 
state  authority  is,  in  some  cases,  the  same  that  was  in  force  prior 
to  the  establishment  of  the  national  system,  in  some  cases  has  been 
revised,  and  in  others  is  of  quite  recent  origin.  In  some  cases,  — 
as,  for  instance,  in  some  of  the  New  England  states  and  in  New 
York,  —  it  is  extremely  elaborate ;  and  in  others,  as  in  Missouri, 
Virginia,  and  parts  of  the  Northwest,  it  enters  into  comparatively 
few  details.  In  some  cases,  the  grant  of  powers  is  wide  enough  to 
cover  all  banking  functions,  including  issue,  and  in  some  it  will  be 

H.R.,  by  Mr.  Henderson,  N.  Car. 
H.R.,  by  Mr.  Dibble,  S.  Car. 
H.R.,  by  Mr.  Richardson,  Tenn. 
Sen.,  by  Mr.  George,  Miss. 
H.R.,  by  Mr.  Bland,  Mo. 
H.R.,  by  Mr.  Wheeler,  Ala. 
Sen.,  by  Mr.  George,  Miss. 
H.R.,  by  Mr.  Richardson,  Tenn. 
H.R.,  by  Mr.  Bland,  Mo. 
H.R.,  by  Mr.  McMillin,  Tenn. 
H.R.,  by  Mr.  Cox,  Tenn. 
H.R.,  by  Mr.  Breckinridge,  Ark, 
H.R.,  by  Mr.  Harter,  Ohio. 
H.R.,  by  Mr.  Harter,  Ohio. 
H.R.,  by  Mr.  Harter,  Ohio. 
Sen.,  by  Mr.  Vance,  N.  Car. 
Sen.,  by  Mr.  Harris,  Tenn. 


1875. 

H.R., 

by  Mr.  Riddle,  Tenn. 

1889 

1876. 

H.R. 

by  Mr.  Atkins,  Tenn. 

1889 

1876. 

H.R. 

by  Mr.  Roberts,  Md. 

1889 

1876. 

H.R. 

by  Mr.  Riddle,  Tenn. 

1891 

1879. 

H.R. 

by  Mr.  Vance,  N.  Car. 

1891 

1879. 

H.R. 

by  Mr.  Buckner,  Mo. 

1891 

1879. 

H.R. 

by  Mr.  Davis,  N.  Car. 

1892 

1882. 

H.R. 

by  Mr.  Gibson,  Ga. 

1892 

1882. 

H.R. 

by  Mr.  Hutchins,  N.Y. 

1892 

1884. 

H.R. 

by  Mr.  Dibble,  S.  Car. 

1892 

1886. 

H.R. 

by  Mr.  Chandler,  Ga. 

1892 

1886. 

H.R. 

by  Mr.  Dibble,  S.  Car. 

1892 

1886. 

H.R. 

by  Mr.  Bennett,  N.  Car. 

1892 

1888. 

H.R. 

by  Mr.  Dibble,  S.  Car. 

1892 

1888. 

H.R. 

by  Mr.  Chandler,  Ga. 

1892 

1889. 

Sen., 

by  Mr.  Vance,  N.  Car. 

1892 

1889. 

H.R. 

,  by  Mr.  Chandler,  Ga. 

1892 

19© 


ESSAYS 


found  that  in  the  revision  of  statutes  in  the  last  generation  the 
issue  of  notes  has  been  prohibited.  The  provisions  for  regulating 
the  operations  of  banks  vary,  from  cases  like  that  of  Massachusetts, 
which  maintains  some  restrictions  so  severe  as  to  prevent  the 
organization  of  any  banks  at  all  under  state  law,  to  such  cases  as 
that  of  New  York,  where  a  thoroughly  organized  state  system  is 
able  to  meet  the  national  system  at  times  on  something  like  equal 
terms.  Some  cf  the  states  have  their  banking  departments  fully 
organized  for  the  purpose  of  supervision  :  others  have  no  organiza- 
tion beyond  the  requirement  of  returns  to  be  made  to  the  auditor 
or  some  other  officer  of  the  state.  The  provisions  for  returns  and 
for  publicity  of  operations  are  generally  imperfect,  and  far  below 
the  standard  of  the  national  system,  many  states  being  content 
with  an  annual  statement  only. 

The  distribution  of  state  banks  under  these  circumstances  is 
extremely  irregular.  In  some  states  none  exist :  in  others  they 
are  strong,  and  their  number  is  rapidly  increasing.  But,  if  we  take 
the  statements  collected  and  published  annually  by  the  Comptroller 
of  the  Currency,  we  shall  find  that  their  great  strength  is  in  the 
group  of  Northwestern  states,  in  two  or  three  states  of  the  centre, 
and  in  a  few  of  the  South  Atlantic  and  Gulf  States.^  It  will  also 
appear,  that  the  capital  of  the  state  banks  is  not  proportional 
to  their  numbers,  but  shows  a  much  lower  average  per  bank  than 
the  capital  under  the  national  banking  system.  This  is  due  in 
part  to  the  general  though  not  universal  preference  of  large  city 
banks  for  organization  under  the  national  system,  and  also  in  part 

1  Of  the  2572  state  banks  covered  by  the  Report  of  the  Comptroller  of  the  Currency 
for  1891,  two-thirds  may  be  grouped  as  follows:  — 

Wisconsin 91  Virginia 93 

Iowa 122  N.  Carolina 29 

Minnesota 93  S.  Carolina 19 

Missouri 401  Georgia 34 

Kansas 134  Kentucky 151 

Nebraska 356  Tennessee 64 

N.  Dakota 5 1  Mississippi 54 

S.  Dakota        65 

1313  444 

New  York  has  176,  Pennsylvania  84,  California  144,  and  the  group  Ohio,  Indiana, 
Illinois,  and  Michigan  have  196.  The  remaining  22  states  have  215  in  all.  This 
account  does  not  include  loan  and  trust  companies. 


THE   BANK-NOTE   QUESTION 


191 


to  the  great  number  of  banks  with  small  capital  organized  under 
state  laws.  The  minimum  of  capital  allowed  by  the  national 
banking  system  being  $50,000,  the  state  systems  in  many  cases  set 
the  minimum  at  $25,000,  as  in  New  York  and  Iowa;  in  others  as 
low  as  $10,000,  as  in  Missouri;  and  in  some  cases  even  as  low  as 
$5000,  as  in  Nebraska,  Kansas,  and  the  Dakotas.  For  the  organi- 
zation of  banks  with  feeble  capital,  therefore,  whether  this  is  the 
result  of  inabiUty  to  provide  more  or  of  limited  employment  for 
capital  in  the  particular  locality,  the  state  laws  often  give  an 
opportunity  not  allowed  by  the  national  system.  That  the  demand 
for  the  establishment  of  small  banks  is  increasing,  especially  in  the 
West  and  South,  is  clear  from  the  recent  legislation  of  the  states, 
and  from  the  marked  increase  in  the  number  of  banks  organized 
under  state  law.^ 

1  The  following  table,  made  up  from  the  reports  of  the  Comptroller  of  the  Currency, 
is  intended  to  show  the  recent  growth  in  number  and  capital  of  state  banks  and  national 
banks  in  two  important  groups  of  states.  The  returns  given  for  state  banks,  being 
partly  official  and  partly  unofficial,  leave  much  to  be  desired,  and  in  the  year  1 884-1 885 
only  supply  the  figures  for  three  States.  It  should  be  said,  also,  that,  in  the  case  of 
Kansas,  the  figures  for  the  two  earlier  years  probably  include  some  savings-banks,  the 
law  of  the  state  not  drawing  the  line  distinctly  at  that  time. 

[Capital given  in  millions  and  tenths. '\ 


State  Banks 

National  Banks 

1884-1885 

I 887-1 888 

I 890- I 89 I 

1884-1885 

1887-1888 

1890-1891 

No. 

Cap. 

No. 

Cap. 

No. 

Cap. 

No. 

Cap. 

No. 

Cap. 

No. 

Cap. 

Wisconsin 





64 

«3-8 

91 

^5-2 

50 

^4-4 

57 

^5-2 

69 

56.8 

Iowa     .     .     . 

— 

— 

74 

4- 

122 

6.4 

122 

10. 1 

129 

10.2 

141 

12.1 

Minnesota 

34 

fo-9 

61 

5-7 

93 

8.1 

50 

"•3 

57 

13-7 

59 

14.1 

Missouri    .     . 

187 

13- 

238 

134 

401 

16.7 

40 

6.3 

49 

"•5 

80 

23-9 

Kansas      .     . 

54 

2.1 

177 

6.6 

134 

5-8 

60 

4- 

146 

II. 2 

152 

13-4 

Nebraska  .     . 

— 

— 

69 

2.2 

356 

9- 

63 

4.8 

104 

8.4 

136 

12.8 

N.Dakota     .-> 
S.  Dakota      .  1 

— 

23 

.6 

51 
65 

•7 
1.8 

35 

2.1 

62 

3-7 

29 
39 

2. 
2.5 

Virginia    . 

— 

— 

64 

3-5 

93 

5.8 

24 

3-5 

25 

3.8 

33 

4-3 

N.  Carolina   . 

— 

— 

16 

I.I 

29 

1.8 

15 

2.4 

19 

2.5 

20 

2.5 

Tennessee 

— 

— 

28 

2-3 

64 

5- 

33 

5- 

40 

7-5 

52 

10. 

Mississippi     . 

— 

— 

14 

X.I 

54 

3-3 

5 

•4 

12 

I.I 

12 

I.I 

192  ESSAYS 

So  far  as  the  legislation  of  the  several  states  still  retains  its 
provisions  for  the  issue  of  notes,  there  is  the  same  variety  which 
existed  before  the  Civil  War.  The  issue  of  notes  by  banks  incor- 
porated under  general  acts,  the  issue  by  banks  under  special  char- 
ters, the  issue  of  notes  by  private  bankers  under  state  regulation, 
may  all  be  found  provided  for  in  one  state  or  another.  In  some 
cases  provisions  have  been  retained  which  contemplate  the  deposit 
of  adequate  security,  and  in  others  no  specific  security  is  called  for. 
In  the  states  which  in  1861  suffered  the  most  from  the  collapse  of 
free  banking  systems  based  upon  inferior  securities,  the  sections 
relating  to  the  issue  of  notes  will  be  found  generally,  and  perhaps 
in  all  cases,  to  have  dropped  out  of  the  statutes  in  some  later  re- 
vision ;  but,  so  far  as  issue  is  still  recognized  by  the  states  as  a 
theoretically  possible  function  of  their  banks,  there  is  the  same 
variety  of  method  and  even  of  purpose  in  the  restrictions  applied 
to  it.  In  the  event,  therefore,  of  a  general  revival  of  state  legis- 
lation upon  this  subject,  there  is  nothing  in  such  provisions  as  now 
exist,  nor  is  there  anything  in  the  character  of  the  other  state  laws 
respecting  banks,  to  lead  us  to  look  for  any  greater  uniformity  of 
system  than  formerly.  Opinions  may  differ  as  to  the  possible 
effect  in  all  parts  of  the  country  of  a  more  enlightened  public 
opinion  in  enforcing  the  demand  for  the  protection  of  note  issues 
by  sound  legislation,  but  there  can  hardly  be  a  difference  as  to  the 
probability  of  great  variety  in  the  methods  of  protection  to  be 
adopted,  and  in  their  comparative  efficacy. 

It  is  clear  that  the  present  demand  for  rejection  of  what  had 
by  common  consent  been  regarded  as  the  most  valuable  character- 
istic of  our  national  bank  currency  —  its  complete  unity  —  cannot 
be  made  by  any  considerable  part  of  our  people  except  under  the 
spur  of  some  keenly  felt  demand.  The  sections  where  the  pres- 
ent movement  probably  finds  its  greatest  strength  are  those  in 
which  heretofore  there  has  often  been  a  strong  tendency  to  favor 
the  exclusive  use  of  that  simplest  of  all  currencies,  the  greenback. 
The  change  of  preference  from  one  issue  to  countless  issues,  from 
notes  having  universal  credit  to  notes  limited  in  their  use  to  a 
state  or  perhaps  a  county,  has  had  some  strong  reason  in  the 
economic  condition  of  the  sections  where  opinion  has  thus  veered. 
The  sections  concerned  are  agricultural ;  they  are  depressed  by  the 
low  prices  of  their  great  products  ;  they  depend  upon  others  for 


THE    BANK-NOTE    QUESTION  I93 

no  small  part  of  their  manufactured  supplies ;  and  their  people 
are  in  debt.  In  a  vigorous  statement  of  the  condition  of  the  South 
a  few  months  ago,  Hon.  H.  A.  Herbert,  of  Alabama,  traced  the 
origin  of  this  state  of  things  to  the  system  of  federal  taxation. 
The  South,  he  maintained,  has  worked  with  incredible  industry 
for  fifteen  years  ;  but  its  gains  have  been  steadily  drained  away  by 
taxation,  to  be  expended  in  other  parts  of  the  country,  and  in  the 
end  the  South  finds  itself  as  poor  as  ever.  Without  discussing  the 
question  here  raised  as  to  federal  taxes,  and  only  noting  that,  if 
we  accept  Mr.  Herbert's  opinion  as  to  their  effect,  the  logical  con- 
clusion would  be  that  the  remedy  should  be  sought  in  a  reform  of 
taxation  and  expenditure,  and  not  in  a  revolution  of  the  currency, 
we  remark  here  the  same  complaints  as  to  insufficient  means  and 
pressure  of  debt  which  have  come  from  the  South  during  the 
greater  part  of  its  existence.  The  condition  of  much  of  the  West 
and  Northwest  has  been  described  by  Hon.  M.  D.  Harter,  of 
Ohio,  in  very  nearly  the  same  terms.^  Those  sections,  as  a  whole, 
also  feel  the  present  stress  of  low  prices,  are  large  buyers  and 
large  debtors.  Aside  from  the  question  as  to  federal  taxation, 
they,  too,  are  pressed,  as  they  always  have  been  pressed,  by  the 
need  of  more  and  more  capital  for  the  development  of  their  abun- 
dant resources  and  the  employment  and  support  of  swiftly  growing 
populations. 

Both  in  the  South  and  in  the  West  evils  of  this  description  have 
been  experimented  upon  for  years,  without  disclosing  any  cure 
except  that  which  comes  with  the  gradual  accumulation  of  wealth 
in  a  mature  community.  Every  form  of  currency  has  been  tried 
by  turns,  —  specie,  paper,  national,  local,  —  with  the  sole  result  of 
showing  that  the  economic  malaise  might  easily  be  aggravated, 
but  could  not  be  cured.  It  has  its  origin  in  the  fact  that  any  coun- 
try which  is  being  rapidly  taken  up,  and  is  therefore  essentially 
new,  whatever  the  age  of  its  political  fabric,  is  apt  to  need  for  pres- 
ent use  more  capital  than  it  has  had  time  or  opportunity  to  acquire. 
As  a  whole,  it  is  in  debt ;  and,  as  individuals,  its  citizens  are  bor- 
rowers. This  pressure  to  borrow  is  plainly  not  to  be  satisfied  by 
dilution  of  the  currency.  Although  the  present  need  of  an  indi- 
vidual debtor  may  be  satisfied  by  mere  paper,  the  relation  of  the 

^  For  the  speeches  of  Messrs.  Herbert  and  Harter,  made  in  Boston,  June  13,  X892, 
see  the  Boston  Herald  of  the  following  day. 
o 


194  ESSAYS 

community,  as  a  whole,  to  other  sections  and  to  the  outside  world 
in  general,  requires  something  more  solid, — something  as  sohd  as 
the  general  standard.  And,  as  now  seems  to  be  generally  rec- 
ognized, the  pressure  is  not  to  be  satisfied  by  an  ampler  currency 
for  the  country  at  large,  however  sound.  Aside  from  the  tempo- 
rary effects  of  any  sudden  change  in  the  general  currency,  alter- 
ation in  its  amount  does  not  alter  the  relation  which  the  sections 
under  rapid  development  bear  to  the  rest.  They  are  still  sure  to 
require  large  supplies  of  capital,  in  one  form  or  another,  beyond 
their  own  ability  to  supply,  and  sure  therefore  to  appear  in  the 
market  as  borrowers. 

But,  as  has  already  been  suggested,  the  individual's  share  in 
this  general  pressure  is  felt  by  him  as  a  need  for  that  which  will 
pay  debts,  a  need  for  currency,  and  so  as  a  need  for  loans  from 
banks  or  bankers  in  any  form  which  will  provide  him  with  the 
means  of  present  payment.  The  rapid  multiplication  of  banks 
under  state  legislation  is  the  natural  expression  of  this  necessity, 
on  the  part  of  the  individual,  of  finding  some  means  for  making 
his  hope  in  the  future  available  as  a  present  supply ;  and  the  oppor- 
tunity is  found  under  the  state  systems,  because  under  them  there 
is  no  requirement  that  any  part  of  the  capital  of  a  bank  should  be 
invested  at  a  rate  so  low  as  three  per  cent,  and  because,  in  other 
respects,  the  state  systems  are  often  freer  from  regulation  and 
from  disagreeable  restrictions.  But  the  tendency  for  an  increase 
of  banks  under  state  legislation  is  only  the  recurrence  in  a  new 
form  of  a  phenomenon  which  has  often  appeared  in  the  history  of 
the  farming  states.  Public  opinion  on  the  subject  of  bank  credit 
has  undergone  many  singular  changes  in  those  states.  Some  of 
them  have  at  times  encouraged  the  wildest  schemes  of  paper  cur- 
rency, have  at  times  rushed  in  despair  to  the  opposite  extreme  of 
discouraging  even  sound  banking,  and  again  have  relapsed  into 
the  old  toleration  of  whatever  can  be  passed  from  hand  to  hand. 
But  at  every  stage  the  real  effort  has  been  the  same,  to  supply 
themselves  with  capital  beyond  their  possible  accumulations,  —  the 
necessity  under  which  any  quickly  developing  and  enterprising 
community  must  needs  find  itself.  It  is  a  real  and  even  inevitable 
want  therefore,  and  not  a  mere  craze  for  expansion,  which  seeks 
satisfaction  at  the  present  time  and  stimulates  the  call  for  a  prac- 
tical restoration  of  the  right  of  issue  to  state  banks. 


THE   BANK-NOTE    QUESTION  195 

Indeed,  it  may  be  added  here  that  the  increase  of  banking  in 
the  West  and  South  has  not  hitherto  been  excessive,  nor  does  it 
generally  tend  to  excess  now.  Omitting  from  consideration  the 
private  bankers,  as  to  whom  there  is  unfortunately  no  longer  any 
means  of  attaining  even  approximate  information,  the  increase  of 
national  and  of  state  banks  together  in  these  sections,  in  the  last 
twenty  years,  has  not  more  than  kept  pace  with  their  general 
growth,  and  has  fallen  behind  the  growth  of  some  of  their  leading 
interests.  The  natural  spread  of  banking  operations  has  appar- 
ently been  hampered  and  held  in  check ;  and  we  should  probably 
be  safe  in  finding  the  obstacles  to  be  the  failure  of  Congress  to 
encourage  organization  under  the  national  system,  which  for  some 
years  has  visibly  checked  the  increase  of  national  banks,  and 
some  reluctance  of  banking  capital  to  organize  under  the  liberal 
but  still  inferior  state  systems. 

But  there  is  an  important  distribution  of  banking  facilities  in 
progress,  in  addition  to  the  simple  expansion  of  their  amount. 
Reference  has  already  been  made  to  the  establishment,  under 
state  systems,  of  banks  with  capitals  much  below  the  minimum 
allowed  by  the  national  banking  law.  No  doubt  many  of  the 
banks  thus  established  are  below  the  minimum  of  safety.  With 
their  trifling  resources,  it  is  impossible  that  they  should  command 
for  their  service  such  experience  and  capacity  as  their  operations, 
although  on  a  small  scale,  really  require  in  the  interest  of  the  com- 
munity. And  yet  the  increase  in  the  number  of  such  small  banks, 
hardly  to  be  distinguished  from  the  smaller  class  of  private  bankers, 
comes  from  an  obvious  tendency  to  carry  banking  facilities  farther 
and  farther  from  the  great  centres  and  to  open  the  way  for  their 
more  general  use  by  the  community  at  large.  In  short,  there  is 
not  only  a  movement  of  increase,  but  a  movement  of  diffusion 
going  on,  which  is  probably  the  result,  not  merely  of  the  general 
pressure  of  debt  in  certain  sections,  already  spoken  of,  but  of  a 
healthy  desire  to  use  more  freely  and  widely  than  has  hitherto 
been  possible  in  sparsely  settled  communities  the  modern  methods 
and  agencies  of  commerce.  The  state  systems  afford  an  opening 
for  this  movement,  and  have  therefore  an  importance  in  the  busi- 
ness organization  of  the  United  States  at  this  moment  not  always 
recognized  in  the  more  densely  populated  and  wealthier  parts  of 
the  country.     With  the  quickened  movement  of   commerce   pro- 


196  ESSAYS 

duced  by  the  railway,  the  telegraph,  and  the  telephone,  an  eco- 
nomic need  for  the  wider  distribution  of  the  machinery  of  exchange 
is  developing,  which  the  smaller  banks  under  the  state  systems 
satisfy,  —  not  perhaps  in  the  best  manner,  but  still  in  an  important 
degree.  When  a  Western  state  provides,  as  Nebraska  does  by  its 
act  of  1889,  that  banks  with  a  capital  of  only  $5000  may  be  estab- 
lished in  towns  having  less  than  one  thousand  inhabitants,  we  must 
recognize  that  for  that  community,  under  its  conditions,  the  complete 
diffusion  of  banking  is  felt  to  be  a  necessity.  In  this  respect,  the 
sparsely  settled  states  are  attemping  to  secure,  by  the  multiplica- 
tion of  independent  banks,  the  same  advantages  which  in  England 
and  Scotland  have  been  obtained  through  the  multiplication  of 
branches  by  a  limited  number  of  banks.^ 

These  considerations  undoubtedly  show  that  the  state  banking 
systems,  in  the  present  condition  of  the  country,  have  an  impor- 
tant sphere  to  fill ;  and  they  raise  the  question,  moreover,  whether 
the  national  banking  system  might  not  be  adapted  by  judicious 
amendment  to  meet  wants  which  it  cannot  now  supply.  Leaving 
aside  altogether  the  conditions  on  which  notes  are  issued,  and 
regarding  the  national  banks  merely  as  banks  of  discount  and 
deposit,  it  would  seem  that  this  might  easily  be  done.  The  smaller 
banks,  especially,  would  be  put  on  far  more  equal  terms  if  they 
were  relieved  from  the  present  useless  obhgation  of  a  relatively 
heavy  investment  in  United  States  bonds.  Moreover,  the  greatest 
possible  diffusion  of  banking  facilities,  under  an  admirably  guarded 
system,  might  be  secured  if  the  establishment  of  branches  were 
encouraged  and  facilitated  by  law.  That,  in  the  present  state  of 
opinion,  the  branches  of  a  central  bank  would  have  to  contend 
with  some  local  jealousies  is  probable  ;  but  any  real  improvement 
in  commerce  or  finance  is  tolerably  sure  to  make  good  its  footing. 
It  is  obvious,  also,  that,  if  the  multiplication  of  branches  were  once 
fairly  recognized  again  in  the  United  States  as  a  natural  method, 
as  it  has  been  in  the  past,  it  would  be  as  available  for  central 
banks  under  the  state  systems  as  for  national  banks.     For  both 

1  The  ten  great  Scotch  banks  have  not  far  from  eight  hundred  branches  in  all, 
carrying  their  operations  into  every  village.  A  similar  practice  in  England  and  Wales 
gives  about  two  thousand  six  hundred  banks  and  agencies  outside  of  the  metropolis. 
Both  in  Scotland  and  in  England  there  is  a  sharp  competition  over  the  vi^hole  field,  so 
that  even  insignificant  towns  are  apt  to  have  more  than  one  banker. 


THE   BANK-NOTE   QUESTION  197 

alike  it  would  have  the  convenience  of  making  it  unnecessary  to 
provide  a  full  board  of  directors  for  every  establishment,  large  or 
small,  —  a  necessity  which  is  often  embarrassing  in  small  places, 
—  since  a  local  manager  under  the  direction  and  supervision  of  a 
central  board  could  often  perform  the  duties  for  which  a  local 
board  now  has  to  be  made  up.  For  both  alike  it  would  tend  to 
diffuse  business  risks  over  somewhat  larger  areas  than  at  present, 
with  a  gain  analogous  to  that  which  such  diffusion  brings  in 
insurance;  and  for  both  it  would  be  possible  to  apply  banking 
capital  at  a  given  moment  according  to  the  unequal  and  variable 
needs  of  the  different  parts  of  any  section  covered  by  a  given  insti- 
tution and  its  agencies. 

But,  besides  a  demand  for  the  extension  and  diffusion  of  bank- 
ing in  the  sections  referred  to  above,  there  is  also  a  pressure,  felt 
more  keenly  by  them,  but  also  observed  elsewhere,  for  greater 
elasticity  in  the  paper  circulation  of  the  country.  In  the  United 
States  —  as  in  other  countries  having  great  annual  movements  of 
agricultural  products  —  there  are  tides  in  the  demand  for  tangible 
currency  for  actual  use.  Increase  or  diminution  of  the  volume  of 
general  exchanges  in  urban  communities  is  readily  enough  adjusted 
by  variation  in  the  amount  of  the  more  subtle  medium  known  as 
bank  deposits ;  but  the  marketing  of  crops  in  many  states  by 
farmers  remote  from  banks,  and  little  accustomed  to  transactions 
through  them,  means  a  temporary  increase  in  the  use  of  money  or 
its  substitutes.  No  doubt  the  extension  and  general  diffusion  of 
banking  will  finally  minimize  this  increase,  as  it  does  in  Great 
Britain,  where  the  annual  tide  of  tangible  currency  is  moderate  in 
its  amount,  although  clearly  visible  in  its  flow ;  and  probably  the 
smaller  banks  in  the  Northwest  do  much  to  meet  this  necessity 
for  an  expansible  medium.  At  present,  however,  the  want  is 
serious,  notwithstanding  the  heavy  shipments  of  currency  annu- 
ally made  in  the  harvest  months  from  the  financial  centres.  With 
this  regularly  recurring  demand  for  an  elastic  medium,  the 
United  States  have  for  years  been  content  with  a  singularly  rigid 
system  of  paper  currency,  approaching  year  by  year  closer  and 
closer  to  the  condition  of  absolute  inflexibility.  The  trifling  gain 
made  by  the  government  from  the  issue  of  treasury  notes  has 
been  treated  as  a  complete  offset  to  the  vastly  greater  loss  caused 
to  the  people  at  large,  by  their  inability  to  use  credit  currency  at 


198  ESSAYS 

the  times  and  in  the  forms  which  our  immense  domestic  commerce 
requires.  Any  reaction  from  this  narrow  conception  of  the  public 
interest  as  something  measured  by  the  footing  of  a  treasury 
account  is  a  hopeful  sign ;  and  it  is  probably  to  the  long-felt  need 
of  some  elastic  quahty  in  our  currency  beyond  that  offered  by  the 
export  and  import  of  metal,  that  much  of  the  existing  desire  to 
find  some  terms  on  which  state  bank-notes  can  be  issued  is  due. 
That  notes  issued  by  banks  in  response  to  a  commercial  demand 
for  loans,  and  redeemable  at  sight  in  specie,  are  in  general  the 
most  convenient  form  of  elastic  currency,  and  the  most  quickly 
responsive  to  the  needs  of  the  community,  is  recognized.  That 
such  notes  are  the  form  of  currency  best  adapted  to  meet  the 
tidal  demand  referred  to  above  seems  to  be  clear.  But  to  make 
their  issue  safe,  to  avoid  the  needless  rigors  of  the  national 
banking  system  and  not  to  lose  its  palpable  advantages,  is  the 
problem. 

Of  the  solutions  offered  for  this  problem,  looking  to  the  re- 
newal of  issues  by  state  banks,  two  now  seem  to  invite  special 
attention  :  first,  the  proposition  to  simply  repeal  the  ten  per  cent 
tax  which  has  excluded  state  bank  issues  from  the  field  since  1866  ; 
and,  second,  the  proposition  to  allow  notes  to  be  secured  by  the 
deposit  of  a  very  wide  range  of  securities,  and  then  to  extend 
the  right  of  issue,  upon  terms  not  settled,  to  all  banks,  state  or 
national. 

The  naked  proposition  to  repeal  the  ten  per  cent  tax  must  be 
treated  as,  in  fact,  a  proposition  to  return  to  the  state  of  things 
existing  before  the  war.  It  is  vaguely  said,  indeed,  that  such  a 
return  is  now  impossible ;  that  no  state  would  consent  to  the  issue 
within  its  borders  of  unsound  notes  ;  that  it  is  an  insult  to  the  intel- 
ligence of  the  state  legislatures  to  suppose  that  any  of  them  would 
be  less  scrupulous  than  Congress  in  providing  for  the  absolute 
security  of  every  dollar  authorized  by  it.  But  all  this  confident 
assurance  is  unsafe  ground  for  legislation.  The  paper  currency  of 
the  country  is  too  important  to  be  left  for  its  regulation  to  our 
faith  in  human  nature  alone ;  and  though  we  may  hope,  or  even 
bcHeve,  that  the  past  will  never  return,  it  is  well  to  be  admonished 
by  experience.  Trust  as  we  may  in  the  universal  desire  of  the 
state  legislatures  to  keep  on  the  solid  basis  of  hard  money,  the 
repeal  of  the  tax  would  indisputably  open  the  door  for  evils  which 


THE   BANK-NOTE   QUESTION  199 

were  rife  only  a  generation  ago,  and  were  no  worse  than  those 
threatened  within  that  period  by  popular  crazes  over  large  sections 
of  the  country.  That  the  loss,  in  case  of  bad  or  mistaken  local 
legislation,  would  be  local,  as  is  sometimes  urged,  is  not  to  be  taken 
for  granted.  On  the  contrary,  with  the  present  close  commercial 
network  covering  the  whole  country,  it  may  be  fairly  assumed  that 
injury  to  any  state  by  reason  of  a  vicious  local  currency  would 
mean  injury  to  others  also,  and  that  in  this  respect,  as  in  others, 
all  are  concerned  in  the  welfare  of  each. 

At  its  best,  therefore,  the  simple  repeal  of  the  ten  per  cent  tax 
means  the  substitution  of  multifarious  issues  for  the  uniform  cur- 
rency of  the  national  banks.  This  follows  as  a  necessity  if  note  issue 
is  left  to  local  legislation,  the  agreement  of  legislatures  upon  a  uni- 
form type  of  bank-note  and  upon  uniform  conditions  of  security 
being  as  impossible  as  their  agreement  upon  any  other  matter  of 
public  concern,  with  the  added  difficulty  that  with  respect  to  banking 
the  real  or  supposed  interests  of  the  different  local  constituencies 
are  notoriously  at  variance.  Federal  supervision  of  issues  made 
under  the  authority  of  the  states  is  sometimes  hinted  at,  but  can 
hardly  be  said  to  be  distinctly  proposed.  Indeed,  it  would  probably 
be  far  from  satisfying  the  wishes  of  those  who  urge  the  simple 
repeal,  their  object  being  apparently  to  secure  something  far  more 
free,  flexible,  and  responsive  to  local  opinion  than  any  federal  reg- 
ulation would  allow.  But,  however  this  may  be,  the  notion  of  a 
federal  control  of  issues  made  by  state  corporations  acting  under 
the  laws  of  the  states  presents  legal  and  constitutional  difficulties 
grave  enough  to  authorize  us  to  lay  it  aside  until  some  distinct 
scheme  for  establishing  such  control  is  formulated. 

Looking  forward,  then,  to  a  state  of  things  in  which  each  state 
should  have  its  own  system  of  issue  again,  with  a  possible  uni- 
formity among  the  notes  of  all  banks  in  any  one  state,  we  must 
contemplate  the  introduction  of  a  bank  circulation  of  unequal  value 
in  different  parts  of  the  Union.  The  uniform  value  which  national 
bank-notes  have  in  every  state  —  the  quaUty  which  was  relied  upon 
from  the  start  as  a  chief  recommendation  of  the  system  —  comes 
from  the  universal  knowledge  that  all  essential  conditions  affecting 
one  note  are  like  those  affecting  any  other,  and  from  the  uniformity 
of  type  which  spares  the  receiver  of  bank-notes  the  trouble  of  even 
reading  the  name  of  the  issuing  bank.     It  may  even  be  doubted 


200  ESSAYS 

whether  the  engagement  for  redemption  at  the  Treasury  gives  them 
any  considerable  addition  of  credit,  or  has  any  practical  effect  in 
increasing  the  confidence  with  which  they  are  taken  at  a  distance 
from  the  place  of  issue.  The  fact  that  one  note  is  substantially 
like  another  in  all  essentials  and  is  receivable  in  payment  by  any 
national  bank  in  any  part  of  the  Union,  secures  absolute  uniformity 
of  values  and  ease  of  flow  in  circulation.  But  this  advantage  is 
necessarily  abandoned  when  the  conditions  of  issue  and  the  degree 
of  ultimate  security  vary  from  state  to  state  and  become  matter  of 
inquiry  whenever  unfamiliar  notes  meet  the  eye,  —  possibly  matter 
of  special  knowledge,  attained  by  experts  only.  The  rich  experience 
of  1 850-1 860  showed  that  even  notes  of  unimpeachable  strength 
found  some  resistance  to  their  circulation,  and  so  lost  something 
of  their  value,  when  far  from  home.  The  dealer  in  un-current 
money  in  those  days  was  a  well-recognized  figure  in  large  cities, 
dealing  not  necessarily  in  bad  bills,  but  in  bills  not  current  on  the 
spot,  and  therefore  subject  to  discount.  Inequahty  of  value  like 
this,  even  if  it  is  the  result  of  mere  unf amiliarity  and  doubt  affecting 
the  notes  of  distant  banks,  is  a  defect  in  a  paper  currency,  and  a 
return  to  it  would  be  a  long  step  backward.  Uniformity  and 
instant  recognition  are  nearly  as  important  for  the  paper  of  the 
country  as  for  its  coin,  and  can  only  be  secured  by  analogous  con- 
centration of  control. 

It  is  to  be  remarked  here  that  the  practical  confinement  of 
local  issues  to  their  own  territory  has  been  advocated,  especially 
within  the  last  few  months,  as  an  arrangement  to  be  desired  on  its 
own  account.  Certain  sections,  it  has  been  contended,  suffer  for  lack 
of  sufficient  currency,  and  their  needs  can  be  supplied  by  ample 
local  issues,  and  this  with  all  the  more  ease  and  certainty  if  such 
ample  issues  have  only  a  restricted  circulation.  This  is  doubtless 
true  on  condition  that  the  local  issues  are  of  inferior  value,  or,  in  other 
words,  depreciated  in  comparison  with  the  currency  of  the  country  at 
large.  It  is  not  many  years  since  the  whole  country,  indeed,  had  a 
local  currency  available  for  use  only  within  the  United  States,  and 
altogether  cut  off  by  its  depreciation  from  the  currency  of  the  world. 
It  is  not  probable,  however,  that,  in  contending  for  localized  issues, 
any  large  number  of  persons  would  now  seriously  propose  the 
establishment,  or  the  possibility  of  establishing,  ten,  twenty,  or 
forty  local  currencies,  each  with  its  own  special  scale  of  deprecia- 


THE   BANK-NOTE   QUESTION  201 

tion  and  discount.  But  whether  such  local  issues  can  be  estab- 
lished, and  have  the  effect  of  insuring  local  abundance  of  currency 
without  depreciation,  is  a  question  which  will  be  considered  further 
in  the  latter  part  of  this  paper. 

The  proposition,  then,  to  simply  aboHsh  the  ten  per  cent  tax, 
or  by  any  other  process  to  remit  the  control  of  note  issue  to  the 
several  state  legislatures,  appears  to  the  present  writer  to  destroy 
the  security  of  the  bank-note  by  opening  the  door  for  abuse  and 
mistake,  and  to  sacrifice  the  immense  advantage  of  a  currency  of 
uniform  value  afforded  by  the  national  bank  system.  We  have, 
then,  to  consider  next  the  proposition  to  widen  the  range  of  secu- 
rities on  which  the  issue  of  national  bank-notes  is  allowed,  and  to 
extend  the  right  of  issue  to  all  banks,  whether  state  or  national. 

This  second  proposition  may  be  taken  most  conveniently  in 
the  forms  in  which  it  has  been  stated  at  different  times  by  Hon. 
M.  D.  Harter,  of  Ohio.  It  contemplates,  in  the  first  place,  the 
admission  of  many  varieties  of  first-class  securities,  as  well  as  the 
bonds  of  the  United  States,  as  the  basis  of  an  issue  of  notes,  on 
the  general  ground,  no  doubt,  that  the  securities  which  the  com- 
munity finds  to  be  solid  enough  for  the  investment  of  trust  funds 
and  of  other  moneys-  requiring  absolute  safety  are  also  solid  enough 
to  be  held  as  a  part  of  the  protection  required  for  bank-notes.  In 
Mr.  Harter's  own  statement  of  this  plan,^  long  considered  and 
carefully  weighed  as  he  assures  his  readers,  he  proposed  to  admit 
state,  county,  city,  and  railway  bonds.  In  a  bill  for  similar  pur- 
poses, to  which  he  has  more  recently  given  his  support,^  state  and 
county  bonds  are  omitted  from  the  list,  probably  on  the  ground  of 
some  practical  difficulties  of  discrimination  between  the  good  and 
the  doubtful,  and,  possibly,  in  view  of  some  difficulties  in  the  way 
of  enforcing  payment  in  case  of  default.  In  both  forms  of  the 
proposition,  the  listing  of  the  bonds  for  five  years  upon  the  stock 
exchange  of  some  large  city,  the  maintenance  of  their  price  at  a 
premium  of  not  less  than  five  per  cent,  and  the  steady  payment  of 
interest,  the  obligation  for  which  must  be  expressly  on  the  gold 
standard,  are  among  the  conditions  to  be  observed,  in  order  that 
bonds  may  be  deposited  by  any  national  bank  desiring  to  issue 
notes.  So  far,  then,  the  proposition  is  in  the  line  of  others  which 
have  been  suggested  in  the  last  few  years,  but  for  some  reason 

1  The  Forum,  October,  1S91,  p.  1S6.  -  Boston  Herald,  June  14,  1892. 


202  ESSAYS 

never  thoroughly  investigated,  looking  to  the  enlargement  of  the 
present  shrunken  basis  of  the  national  bank  note  system.  In  the 
method  of  extending  the  right  of  issue  to  state  banks,  however, 
the  two  forms  of  the  plan  differ  radically.  In  its  earlier  form 
Mr.  Harter  proposed  that  the  tax  upon  notes  of  state  banks 
should  cease,  provided  such  notes  are  secured  in  the  same  manner 
as  notes  of  national  banks  by  bonds  deposited  with  the  auditor 
or  treasurer  of  the  state,  and  provided  that  each  state  should 
guarantee  the  payment  of  the  notes  issued  by  its  own  banks,  the 
amount  of  notes  to  be  issued  by  state  banks  being  determined  by 
each  state  for  itself,  and  the  state  banks  not  being  required  to 
redeem  elsewhere  than  at  their  own  counters.  In  the  later  form 
of  the  plan,  after  providing  that  the  United  States  shall  no  longer 
guarantee  the  payment  of  national-bank  notes,  —  a  provision 
which  is  strengthened  by  the  proposed  abolition  of  the  present  five 
per  cent  redemption  fund,  — it  is  simply  proposed  that  the  notes 
of  state  banks  shall  be  subject  to  the  same  tax  as  notes  of  national 
banks,  and  no  more. 

In  its  later  form,  this  plan,  to  which  Mr.  Harter  has  now  com- 
mitted himself,  is  not  to  be  distinguished  from  the  naked  proposi- 
tion to  simply  repeal  the  tax  on  state  bank  issues,  leaving  them  to 
enter  the  field  upon  such  terms  of  security  and  in  such  quantity 
as  the  state  legislatures  may  severally  prefer,  —  allowing  the 
national  banks  to  compete  with  them  upon  terms  in  some  respects 
better  than  at  present  and  in  others  worse.  The  unity  and  the 
uniformity  of  value  of  the  bank  circulation  is  to  be  destroyed,  and 
our  only  security  from  unsound  and  depreciated  local  issues  is  to 
be  found  in  the  chance  that  all  state  legislatures  may  have  learned 
equally  well  the  hard  lessons  of  financial  safety. 

In  its  earher  form,  Mr.  Harter's  proposition  appears  to  have 
been  more  promising.  It  held  out  the  prospect  of  a  uniform  basis 
of  security  for  state  issues  and  national  alike.  No  doubt  the  first 
attempt  to  throw  into  shape  rules  for  its  practical  operation  would 
have  shown  the  necessity  of  placing  both  kinds  of  issue  under 
national  supervision  and  control.  This  would  have  given  the 
system  a  strong  resemblance  to  that  embodied  in  the  first  national 
bank  act  (the  act  of  February  25,  1863),  for  enabling  banks,  while 
still  carrying  on  business  under  state  laws,  to  issue  national  cur- 
rency secured  by  the  deposit  of  United  States  bonds  in  the  Treas- 


THE   BANK-NOTE   QUESTION  203 

ury  at  Washington. ^  This  provision,  which  at  the  time  answered 
the  purposes  neither  of  the  friends  nor  of  the  opponents  of  the 
national  banking  system,  was  strongly  disapproved  by  Mr. 
McCulloch,  then  Comptroller  of  the  Currency  ^  and  deeply  inter- 
ested in  extending  the  national  system,  was  struck  out  from  the 
revised  act  of  1864,  and  thus  never  took  effect.  At  that  particular 
juncture,  when  Congress  had  undertaken  to  obtain  the  whole  field 
of  circulation  for  a  secured  national  currency,  there  was  no  place 
for  such  a  halfway  measure.  At  the  present  time,  when  the 
national-bank  notes  are  being  pinched  out  of  existence  by  the 
failure  of  Congress  to  provide  a  wider  basis  for  them,  and  when 
unlimited  license  for  state  issues  is  demanded  as  the  alternative 
which  is  to  save  us  from  a  paper  currency  depending  for  its 
amount  upon  the  bare  dictate  of  Congress,  the  opportunity  for  a 
measure  which  should  place  state  and  national  issues  upon  the 
same  footing  and  under  the  same  guardianship  would  seem  to  be 
better.  But  Mr.  Harter's  proposition,  while  proposing  the  same 
basis  of  bonded  security  for  all  issues,  falls  immeasurably  below 
the  short-lived  scheme  of  1863,  inasmuch  as  it  lacks  the  unity  of 
control  which  is  the  only  possible  guarantee  for  faithful  and  uni- 
form enforcement.  It  is  not  surprising,  then,  that,  having  once 
set  himself  in  opposition  to  national  control,  he  should  now  have 
taken  the  further  step  of  proposing  to  leave  the  regulation  of  state- 
bank  issues  altogether  to  the  discretion  and  prudence  of  the  state 
legislatures. 

In  these  propositions,  which  we  have  taken  as  somewhat  typical, 
and  in  a  large  part  of  the  current  discussion  of  this  subject,  there 
is  expressed,  as  we  have  said,  a  strong  desire  to  provide  for  ample 
local  currencies  in  particular  sections.  This  is  quite  independent 
of  any  judgment  as  to  the  feasibility  of  widening  the  basis  of  the 
national  currency  and  so  rehabilitating  that  system  of  issue.  It 
is  urged  as  a  defect  of  the  national-bank  note  that  it  goes  into 
circulation  "  with  no  localizing  tendency,  with  no  habitat,  but  en- 
dowed with  every  attribute  tending  to  induce  its  centralization  at 
the  great  financial  cities  and  its  removal  from  the  country  dis- 
tricts."^    In  short,  it  is  objected  that  the  bank-notes  now  have 

1  See  sections  61-64  of  the  national  bank  act  of  1863. 

"^  Report  of  the  Comptroller  of  the  Currency,  1863. 

3  Commercial  and  Financial  Chronicle,  May  14,  1892,  p.  7S2. 


204  ESSAYS 

the  quality  of  metallic  money,  and,  like  gold,  will  flow  and  accu- 
mulate as  the  current  of  internal  commerce  may  require,  having 
hardly  more  tendency  to  remain  near  the  place  of  issue  than  coin 
has  to  stay  in  the  neighborhood  of  the  mint,  except  so  far  as  their 
movements  are  arrested  by  redemption  at  the  Treasury. 

It  will  assist  us  in  weighing  the  force  of  this  objection  if  we 
first  consider  the  movement  of  a  currency  exclusively  of  coin.  It 
is  distinctly  recognized  that  a  coin  medium  will  not  distribute 
itself  with  equal  depth  over  sections  of  a  country  which  differ  in 
resources,  industry,  and  acquired  wealth.  Notwithstanding  the 
immense  volume  of  transactions  settled  finally  by  exchange  of 
products,  the  farming  sections  will  steadily  keep  themselves  bare 
of  coin  by  their  heavy  purchases  in  anticipation  of  the  future,  and 
by  their  normally  increasing  payments  for  interest  on  the  capital 
invested  among  them  by  non-residents.  If  they  were  less  enter- 
prising and  progressive,  payment  in  products  might  keep  pace 
with  their  obligations ;  but  their  vigorous  industry  constantly  im- 
pels them  to  push  the  use  of  their  credit  and  to  keep  their  stock 
of  money  low.  As  communities,  they  invite  loanable  funds  by 
high  rates  of  interest ;  but  no  transfer  effected  in  this  way  gives 
anything  more  than  a  temporary  relief  from  the  dearth  of  coin. 
In  the  present  stage  of  their  development  they  have  uses  for 
goods  which  stand  higher  in  their  estimation  than  their  uses  for 
money. 

In  describing  the  unequal  distribution  of  a  medium  supposed 
to  be  exclusively  of  coin,  the  language  used  runs  of  itself  into  the 
present  tense,  as  though  the  imagined  medium  were  really  existent, 
because  that  which  is  true  of  coin  in  this  particular  is  true  also  of 
a  paper  currency  which  is  really  redeemable  in  coin  and  is  of  uni- 
versal credit.  Such  paper  will  serve  the  purpose  of  remittance 
and  payment  as  well  as  coin,  and  will  be  collected  and  remitted 
accordingly,  when  the  conditions  of  trade  would  cause  coin  to  be 
so  used.  This  will  be  effected  directly  or  indirectly  by  the  people 
themselves  in  making  their  necessary  payments;  and  the  converti- 
ble paper,  like  the  coin  in  its  distribution  over  the  surface  of  the 
country,  will  be  found  in  greater  depth  at  the  financial  centres, 
because  it  is  there  that  payments  are  due,  and  because,  under 
existing  conditions  of  supply  and  demand,  payments,  if  made  in 
products  alone,  can  only  be  completely  so  made  when  the  local 


THE   BANK-NOTE   QUESTION  205 

currency  is  at  the  minimum  quantity.  This  state  of  things,  which 
we  believe  is  also  as  well  recognized  as  the  inequality  with  which 
coin  alone  would  distribute  itself,  is  not  to  be  remedied  by  raising 
the  general  level  of  the  supply  of  convertible  paper  in  the  country 
at  large.  Aside  from  the  effect  which  might  thus  be  produced  on 
the  movements  of  money  between  this  country  and  others,  the 
increase  of  the  general  mass  would  only  temporarily  change  the 
relations  of  the  farming  sections  to  others,  even  if  the  whole 
addition  were  first  to  come  into  circulation  in  those  sections. 
Their  industrial  conditions  would  still  cause  them  to  part  with  all 
but  their  quota  of  the  increased  amount,  and  they  would  soon  be 
found  in  possession  of  only  their  customary  proportion  of  coin 
and  paper,  and  subject  to  the  same  inconveniences  as  ever. 

But  let  us  now  suppose  that,  instead  of  a  redeemable  paper 
having  universal  credit,  each  section  uses  a  redeemable  paper 
having  only  local  credit,  having  a  "  habitat,"  therefore,  and  certain 
to  circulate  only  within  or  near  the  state  in  which  the  issuing 
bank  is  established.  Is  it  not  certain  that,  if  the  trade  relations 
of  an  agricultural  section  are  such  as  would  draw  away  from  it 
coin  or  its  paper  of  universal  credit,  if  such  a  medium  existed, 
they  will  now  equally  draw  from  it  coin  or  legal  tender  paper, 
these  being  obtained  by  sending  in  bank-notes  for  redemption  ? 
The  bank-notes  are  not  themselves  available  as  a  remittance  ;  but, 
if  redeemable,  they  can  instantly  be  turned  into  that  which  is 
available.  This  would  leave  a  really  redeemable  local  currency  in 
the  same  scanty  condition,  and  for  the  same  reasons,  as  a  medium 
of  national  credit  would  be  under  the  same  circumstances.  We 
may,  indeed,  suppose  that  the  local  banks,  the  issuers  of  currency, 
continue  to  issue  notes  in  place  of  those  which  are  redeemed,  and 
attempt  thus  to  raise  materially  the  level  of  paper  in  their  neigh- 
borhood. In  that  case,  their  vaults  become  the  ready  source  from 
which  gold  may  be  drawn  for  export  from  the  section,  and  the 
relative  cheapness  of  gold  in  the  section  gives  a  motive  for  its 
export,  either  to  pay  for  fresh  purchases  of  goods  or  for  use  in 
other  money  markets.  In  short,  so  long  as  the  redemption  of 
paper  is  real,  the  restricted  area  of  its  circulation  will  not  supply 
the  means  of  raising  the  level  of  a  local  currency  permanently 
above  the  mark  which  is  settled  by  the  normal  course  of  payments 
to  and  from  the  state  or  section  concerned.     It  is  true  that,  if  the 


206  ESSAYS 

redemption  is  not  real,  if  the  paper  is  openly  or  disguisedly  incon- 
vertible, it  may  be  heaped  up  within  the  given  area  to  an  indefinite 
amount  and  with  a  corresponding  depreciation. 

The  question,  then,  whether  the  restoration  of  the  state-bank 
issues  and  their  regulation  at  the  pleasure  of  the  states  is  to  be 
followed  by  real  specie  payment  by  state  banks  or  by  suspension, 
is  of  critical  importance ;  and  it  may  be  doubted  whether  it  has 
been  faced  squarely  by  those  who  advocate  such  issues  as  a  source 
of  locally  abundant  paper.  But  here,  after  all,  would  seem  to  be 
the  kernel  of  the  whole  question ;  for,  on  the  supposition  that 
specie  payments  are  to  be  maintained  everywhere,  —  as  most  of 
the  advocates  of  state  issues  must  be  supposed  to  intend,  — the 
proposed  change  must  be  futile  for  its  avowed  purpose ;  and,  if 
suspension  is  to  follow  or  to  be  risked  anywhere,  the  measure 
is  an  abandonment  of  that  solid  ground  of  hard  money  which  our 
people,  after  a  long  and  bitter  experience,  finally  reconquered 
under  the  resumption  act  of   1875. 

In  this  discussion  the  varied  political  aspects  of  the  question 
before  us  have  had  hardly  a  passing  glance  ;  and  it  is  not  worth 
while  to  enter  upon  them  now,  except  to  notice  the  frequency 
with  which,  in  one  form  or  another,  the  argument  z«  terrorem  is 
advanced,  —  the  argument  that  the  state-bank  issues  should  be 
freed  from  restriction  lest  a  worse  thing  befall  us.  We  are  told 
that  it  is  idle  to  hope  for  action  which  shall  give  a  future  to  what 
is  called  the  national-bank  monopoly,  and  that  the  state  banks, 
therefore,  afford  the  only  chance  for  a  credit  paper  issued  in 
response  to  commercial  demand ;  and  that  state-bank  notes  alone 
can  save  us  from  complete  surrender  of  the  field  to  government 
issues ;  and  that  the  restoration  of  local  currencies  is  alone  able  to 
divert  a  large  section  of  our  people  from  the  crusade  in  favor  of 
the  free  coinage  of  silver.  It  may  be  true  that  there  is  ground 
for  anxiety  in  one  or  all  of  these  directions.  But,  if  the  financial 
history  of  the  United  States  teaches  any  lesson,  it  is  this :  that, 
with  the  American  people,  sound  doctrine  and  salutary  measures 
are  strongest  when  their  advocates  are  fearless,  and  refuse  to  yield 
ground  to  the  suggestions  of  timid  expediency. 


THE  SAFETY  OF  THE  LEGAL  TENDER  PAPER  i 

The  legal  tender  notes  of  the  United  States  present  now,  as 
they  always  have  presented,  an  appearance  of  great  simplicity. 
There  are  still  but  two  such  issues,  the  United  States  notes  of  the 
Civil  War  and  the  coin  notes  of  1890:  their  legal  tender  power 
has  few  exceptions,  and  the  obligation  for  their  redemption  is  to 
be  read  in  a  few  lines.  Take  away  the  confusing  element  intro- 
duced by  the  silver  agitation,  which  is  quite  extraneous  to  the 
original  conception  of  the  legal  tender  paper,  and  what  is  in  itself 
better  suited  for  easy  comprehension  or  has  more  prima  facie 
attractions  than  a  system  of  government  notes,  established  by  the 
authority  and  resting  on  the  credit  of  the  nation  .-' 

But,  simple  as  the  notes  themselves  may  appear,  it  is  by  no 
simple  process  that  the  conditions  under  which  they  are  now 
issued  have  been  arrived  at.  Our  legislation  on  this  subject  now 
covers  a  period  of  thirty-five  years.  During  that  time  there  has 
been  a  rapid  succession  of  important  legislative  acts  bearing  upon 
the  legal  tender  paper  and  some  administrative  acts  of  equally 
serious  import.  The  system,  as  we  have  it  to-day,  is,  therefore,  a 
product,  not  of  any  compact  declaration  by  the  law-making  power, 
but  of  a  singularly  complex  series  of  laws  and  executive  orders. 
It  is  to  some  aspects  of  this  series,  —  or,  in  other  words,  to  some 
aspects  of  the  history  of  the  legal  tender  issues,  —  and  to  some 
considerations  flowing  therefrom,  that  I  desire  to  direct  the  atten- 
tion of  readers  of  this  article.  Accepting  the  constitutionality  of 
the  legal  tender  acts,  as  settled  by  the  repeated  decisions  of  the 
Supreme  Court,  and  waiving  all  questions  as  to  the  necessity  of 
the  acts  or  of  either  of  them,  as  foreign  to  my  present  subject,  I 
wish  to  inquire  what  inferences  are  to  be  drawn  from  the  manner  4 
in  which  the  authority  of  Congress  has  been  exercised,  and  how 
far  the  prima  facie   attractions   of    our   paper   legal    tender   are 

1  Quarterly  Journal  of  Economics,  April,  1897. 
207 


208  ESSAYS 

thereby  affected.  For  this  purpose,  it  will  be  necessary  to  make 
a  short  recapitulation  of  the  chief  legislative  and  executive  acts 
which  mark  the  period  opened  by  the  first  Legal  Tender  Act  and 
relate  to  the  same  subject-matter,  and  to  do  this  even  at  the  risk 
of  stating  much  with  which  the  reader  must  be  supposed  to  be 
familiar. 

1.  The  leading  advocates  of  the  act  of  February  25,  1862, 
pressed  that  measure  upon  Congress  as  a  temporary  expedient 
forced  upon  the  country  by  the  stress  of  war  (i 861-1862,  ch.  33). 
They  also  pressed  it  as  a  measure  which  had  its  place  in  a  large 
scheme  of  legislation,  by  which  they  expected  to  provide  a  per- 
manent paper  currency  exclusively  of  bank-notes.  To  meet  the 
urgent  needs  of  the  Treasury,  a  limited  amount  of  legal  tender 
notes  were  to  be  issued,  exchangeable  at  the  pleasure  of  the 
holder  for  United  States  bonds,  and  the  bonds  were  to  be  made 
the  basis  of  a  bank  currency.  Issued,  exchanged,  and  reissued, 
the  notes  were  expected  to  open  a  market  for  a  large  amount  of 
bonds,  and  finally  to  be  absorbed  and  disappear.  It  may  be 
doubted  whether  the  majority  in  Congress  were  then  ready  to 
accept  the  whole  of  this  comprehensive  scheme,  but  there  is  no 
doubt  that  the  majority  agreed  to  the  issue  as  something  not 
intended  long  to  survive  the  exigency  which  called  it  into  being. 
Even  with  this  restricted  view  of  the  scope  of  the  legislation,  the 
provision  making  the  notes  exchangeable  for  bonds  was  plainly  a 
matter  of  prime  importance.  It  was  looked  upon  as  offering  a 
possible  outlet  for  the  notes  in  case  the  circulation  were  overloaded 
with  them,  and  it  provided  the  means  for  their  withdrawal  when 
the  present  need  should  have  passed  by  and  the  public  credit 
should  have  begun  to  advance.  The  bonds  having  been  made 
coin  bonds,  the  exchangeability  of  the  notes  was  the  ground  of 
hope  for  their  present  credit  and  ultimate  redemption. 

2.  But  the  expectations  of  the  advocates  of  the  first  Legal 
Tender  Act  were  disappointed.  Although  some  sanguine  leaders 
had  predicted  that  the  whole  of  the  first  issue  would  not  be  used, 
a  second  issue  was  called  for  by  the  Treasury,  and  a  third.  It 
was  also  discovered  that,  so  long  as  notes  could  be  exchanged  for 
bonds  at  par,  the  price  of  bonds  could  not  rise  above  that  point, 
and  that  with  this  limitation  of  possible  profit  the  present  induce- 


THE   SAFETY   OF   THE   LEGAL   TENDER   PAPER  209 

ment  for  exchange  was  too  small  to  invite  large  operations.  At 
the  instance  of  the  Treasury,  therefore,  and  in  order  to  facilitate 
the  sale  of  bonds.  Congress,  in  the  Ways  and  Means  Act  of  March 
3,  1863,  declared  that  the  right  to  exchange  the  notes  should 
cease  from  the  first  day  of  the  following  July  (1862-1863,  ch.  73, 
§  3).  One  year,  therefore,  saw  the  central  provision  of  the  original 
system  abolished,  and  without  debate  in  either  House.  "  This 
act,"  says  Mr.  Sherman,  in  one  of  his  numerous  references  to  the 
subject,  "  though  convenient  in  its  temporary  results,  was  a  most 
fatal  step,  and  for  my  part  in  acquiescing  in  and  voting  for  it  I 
have  felt  more  regret  than  for  any  other  act  of  my  official  life."  ^ 

3.  The  summer  of  1864  saw  the  worst  fears  as  to  a  resort  to  a 
paper  legal  tender  fully  justified.  At  the  end  of  June  the  out- 
standing United  States  notes  were  1^431,000,000;  there  were  also 
in  circulation  ^168,000,000  of  interest-bearing  notes  which  were  a 
legal  tender  for  their  face ;  and,  in  response  to  the  urgent  demand 
of  the  Treasury,  authority  for  an  additional  issue  of  ;^200,ooo,ooo 
of  similar  interest-bearing  legal  tender  notes  was  to  be  embodied 
in  the  Ways  and  Means  Act.  Gold,  which  in  April  stood  at  180, 
was  starting  on  the  rapid  ascent  which  carried  it  to  240  on  the  ist 
of  July.  Congress  was  engaged  in  an  unsuccessful  effort  to  pre- 
vent time-sales  of  gold  and  of  foreign  exchange,  by  means  of  what 
has  been  known  as  "  The  Gold  Bill "  ;  and  confusion,  distrust,  and 
discredit  were  rapidly  gaining  ground.  As  a  reassuring  measure, 
therefore,  to  quiet  public  alarm,  a  clause  was  incorporated  in  the 
Ways  and  Means  Act  declaring  that  the  total  amount  of  United 
States  notes  should  never  exceed  1^400,000,000,  and  a  possible 
temporary  addition  of  ^50,000,000,  if  required  for  the  payment  of 
private  deposits  then  held  by  the  Treasury  (i 863-1 864,  ch.  172,  §  2). 
This  limitation  of  the  issue  of  United  States  notes  was  a  wise 
concession  to  public  opinion,  and  without  doubt  had  its  influence 
in  the  next  few  months  in  raising  the  public  credit ;  but  the  ability 
of  Congress  to  maintain  such  a  restriction  under  the  pressure  of 
any  great  exigency  was  never  put  to  a  severe  test,  and  the  happy 
ending  of  the  war  nine  months  later  abruptly  introduced  an  en- 
tirely new  order  of  questions  relating  to  the  legal  tender  issues. 

4.  So  far  as  the  temper  of  the  public  was  concerned,  the  first 
months  of  peace  were  remarkably  favorable  for  measures  looking 

^  Speech  in  the  Senate,  March  6,  1876  ;   to  be  found  in  his  "  Speeches,"  p.  496. 
P 


2IO  ESSAYS 

towards  specie  payment  and  the  withdrawal  of  the  legal  tenders ; 
and  it  was  probably  a  misfortune  that  Congress  was  not  then  in 
session  to  improve  a  moment  which  in  other  respects  was  oppor- 
tune, and  to  do  this  before  the  apprehension  of  contraction  or  any 
of  the  real  dangers  of  that  process  should  be  seriously  felt.  But 
when  Congress  met  in  December,  1865,  —  after  the  announcement 
of  his  policy  by  Secretary  McCulloch,  —  the  strength  of  feeling 
was  still  such  that,  by  a  vote  of  144  to  6,  the  House  of  Represent- 
atives adopted  a  resolution  of  cordial  concurrence  "  in  the  views 
of  the  Secretary  of  the  Treasury  in  relation  to  the  necessity  of  a 
contraction  of  the  currency  with  a  view  to  as  early  a  resumption 
of  specie  payments  as  the  business  interests  of  the  country  will 
permit,"  and  pledged  its  cooperation  to  that  end. 

5.  A  secretary  gifted  with  tact  in  dealing  with  other  men, 
and  standing  aloof  from  the  political  contests  of  the  time,  might 
perhaps  have  made  this  proffer  of  concerted  effort  the  basis  of  a 
successful  policy ;  but  Mr.  McCulloch  had  not  that  tact,  and  was 
so  far  identified  with  the  reconstruction  policy  of  President  John- 
son as  to  share  the  odium  incurred  by  the  latter  in  his  struggle 
with  Congress.  Four  months  after  the  declaration  of  December, 
1865,  Congress,  in  making  provision  for  the  retirement  of  Treas- 
ury notes,  forbade  the  Secretary  to  retire  more  than  $10,000,000  of 
United  States  notes  within  the  next  six  months,  or  more  than 
^4,000,000  in  any  one  month  thereafter  (1865-1866,  ch.  28). 

6.  The  Secretary  did  not  use  to  its  full  extent  the  authority 
allowed  him  by  Congress.  The  commercial  revulsion  which  began 
in  London  in  1866  was  followed  by  continued  depression  in  this 
country,  the  public  mind  became  more  and  more  sensitive  on  the 
subject  of  contraction,  and  wild  demands  began  to  be  made  for  the 
payment  of  the  five-twenty  bonds  in  legal  tender  notes.  The 
Finance  Committee  of  the  Senate,  in  December,  1867,  reported  a 
bill  providing  for  the  exchange  of  these  bonds  for  a  five  per  cent 
coin  bond,  the  offer  resting  upon  the  avowed  calculation  that  the 
right  of  the  public  creditor  was  doubtful,  and  that  he  would  find  it 
for  his  advantage  to  take  a  bond  bearing  a  lower  rate  of  interest 
and  free  from  cloud.  In  the  discouraged  state  of  mind  indicated 
by  this  proposition.  Congress,  in  February,  1868,  "suspended" 
altogether  the  authority  previously  given  to  the  Secretary  "  to 
make    any  reduction  of   the  currency  by  retiring  and  cancelling 


THE   SAFETY   OF   THE   LEGAL   TENDER   PAPER  21 1 

United  States  notes";  and  thus  the  first  movement  for  a  return 
towards  specie  was  peremptorily  closed  (1867- 1868,  ch,  6),  The 
notes  outstanding  had  been  reduced  from  about  $400,000,000  to 
1^356,000,000;  but  this  reduction  had  been  offset  by  an  increase  of 
national-bank  notes  during  the  same  months. 

7.  Happily,  the  Republican  National  Convention  in  July,  1868, 
planted  itself  on  firm  ground  as  to  the  payment  of  the  five-twenty 
bonds,  and  in  its  platform  denounced,"  all  forms  of  repudiation" 
and  called  for  the  payment  of  all  creditors,  "not  only  according  to 
the  letter,  but  the  spirit  of  the  laws."  The  Democratic  party  a 
few  weeks  later  gave  its  support  to  what  was  supposed  to  be  the 
popular  craze  of  the  day,  and  upon  this  issue  and  others  was  badly 
beaten.  General  Grant  was  elected  after  an  excited  canvass  ;  and 
the  popular  verdict  was  registered  in  an  "  Act  to  strengthen  the 
Public  Credit,"  approved  in  March,  1869,  being  the  first  act  passed 
under  the  new  administration.  This  law  declared  the  faith  of  the 
United  States  to  be  pledged  to  the  payment  of  both  notes  and 
bonds  in  coin,  except  when  the  law  under  which  they  were  issued 
had  expressly  provided  for  payment  otherwise,  and  closed  by 
further  pledging  the  faith  of  the  United  States  "  to  make  provision 
at  the  earliest  practicable  period  for  the  redemption  of  the  United 
States  notes  in  coin  "  (1869,  ch.  i). 

8.  Nothing  was  done  towards  giving  effect  to  this  pledge. 
Secretary  Boutwell,  in  December,  1869,  suggested  that  authority 
should  be  given  for  reducing  the  circulation,  as  occasion  might 
offer,  by  an  amount  not  exceeding  $2,000,000  in  any  one  month  ; 
but  it  was  clear  that  he  did  not  regard  the  matter  as  of  any 
present  importance,  and  no  action  was  taken.  Congress  had 
apparently  acquiesced  in  the  policy  of  allowing  the  country  to 
"grow  up"  to  a  currency  admitted  to  be  excessive.  A  year  or 
two  later,  however,  it  appeared  that  the  Treasury  had  on  more 
than  one  occasion  issued  legal  tender  notes  in  lieu  of  a  part  of 
those  "retired  and  cancelled"  by  Secretary  McCulloch.  The 
question  as  to  the  legality  of  any  such  reissue  was  referred  by  the 
Senate  to  its  Finance  Committee;  and  the  majority  of  that  com- 
mittee, headed  by  Mr.  Sherman,  reported  a  resolution  that  the 
Secretary  "  has  not  the  power  under  existing  law  "  to  issue  notes  for 
any  portion  of  those  retired  under  the  act  of  1866.  The  question 
involved  was  of  moment ;  for,  if  $5,000,000  could  be  issued  by  the 


212  ESSAYS 

Secretary  at  his  discretion,  so  could  1^44,000,000,  and  the  whole  of 
the  ground  supposed  to  have  been  gained  by  the  payment  of  this 
form  of  debt  might  thus  be  lost.  The  resolution,  however,  was 
not  called  up  for  action,  and  at  the  end  of  the  session  the  Secretary 
might  easily  have  felt  that  his  action  had  the  tacit  acquiescence 
of  Congress. 

9.  Mr.  Boutwell's  successor,  Secretary  Richardson,  having 
paid  out  in  the  revulsion  of  1873  a  large  part  of  his  cash  balance 
in  the  vain  effort  to  relieve  the  money  market  by  the  purchase  of 
bonds,  soon  found  himself  so  crippled  by  the  decline  of  revenue 
that  in  October,  1873,  he  began  paying  out  the  retired  notes  for 
ordinary  expenses;  and  this  reissue  was  continued  until,  at  the 
beginning  of  February,  1874,  when  the  revenue  had  recovered 
from  its  collapse,  $26,000,000  of  the  notes  were  again  in  circula- 
tion, raising  the  total  to  $382,000,000. 

10.  At  the  long  session  of  1874  Congress  first  passed  the 
so-called  inflation  bill,  vetoed  by  President  Grant,  by  which  the 
issue  of  legal  tender  notes  was  to  be  increased  to  $400,000,000 
and  the  possible  issue  of  national-bank  notes  was  to  be  raised  to 
the  same  point,  and  then  adopted  the  Compromise  Act  of  June, 
1874,  by  which,  among  other  provisions,  it  was  declared  that  the 
amount  of  legal  tender  notes  should  be  fixed  at  $382,000,000 
(1873-1874,  ch.  343,  §  6).  The  amount  reissued  by  Secretary  Rich- 
ardson was  thus  made  a  part  of  the  permanent  currency,  and  so 
remained  until  the  work  of  withdrawal  began  anew  under  the 
Resumption  Act  of   1875. 

11.  The  Resumption  Act  was  not  prepared  with  open  doors; 
and,  doubtless,  there  is  much  in  its  secret  history  which  would  be 
of  great  interest.  Certainly,  its  public  history,  if  we  view  it  as  a 
measure  for  financial  reform,  is  unique.  The  bill,  introduced  by 
the  Finance  Committee  of  the  Senate,  was  admitted  to  be  the 
work  of  a  party  caucus,  in  which  no  agreement  could  be  reached 
except  by  consenting  to  leave  a  principal  point  unexplained. 
Whether  legal  tender  notes,  when  "redeemed  "  in  the  language  of 
the  bill,  could  be  reissued  or  not,  Mr.  Sherman,  who  had  charge 
of  the  measure,  steadily  refused  to  say,  knowing  well  that  any 
explicit  answer  would  drive  off  one  wing  or  the  other  of  his 
expected  majority,  and  deeming  it  his  business  to  carry  the  bill 
through  by  whatever  means.     It  was  passed  by  the  Senate,  there- 


THE   SAFETY   OF   THE   LEGAL   TENDER   PAPER  213 

fore,  with  an  obstinate  refusal  on  the  part  of  its  chief  advocate  to 
state  the  meaning  and  effect  of  its  leading  provision.  In  the 
House  all  risk  of  explanation  was  avoided,  by  forcing  the  bill 
through  without  debate  under  the  operation  of  the  previous  ques- 
tion ;  and  thus  the  great  work  of  resumption  was  entered  upon, 
with  absolutely  no  authoritative  determination  of  the  main  question 
whether  redemption  would  end  the  legal  tender  currency  or  not 
(1874-1875,  ch.  15).  It  was  only  certain  that,  when  the  measure 
should  finally  be  interpreted  for  purposes  of  administration,  one 
section  or  the  other  of  its  supporters  would  meet  with  bitter  dis- 
appointment. 

12.  As  a  preparation  for  actual  specie  payment  in  1879,  the 
Resumption  Act  provided  for  a  gradual  reduction  of  outstanding 
legal  tender  notes  from  $382,000,000  to  $300,000,000,  so  far  as  such 
reduction  could  be  offset  by  the  issue  of  national-bank  notes  by 
new  banks,  or  by  old  ones  increasing  their  circulation.  This  de- 
vice for  avoiding  a  contraction  in  the  total  currency  was  defeated 
by  an  unexpected  surrender  of  bank  circulation  under  the  pressure 
of  the  times ;  and  the  consequent  net  reduction  of  legal  tender 
notes  and  bank-notes  came  to  be  regarded  in  some  parts  of  the 
Union  as  the  cause  of  the  depression,  which  deepened  in  this 
country  in  1876  and  1877  as  it  did  in  the  greater  part  of  Europe. 
When  Congress  came  together  in  October,  1877,  a  bill  was  at  once 
reported  to  the  House  by  the  Committee  on  Banking  and  Currency 
to  repeal  the  third  section  of  the  Resumption  Act,  this  section  con- 
taining all  the  provisions  as  to  the  redemption  of  the  United  States 
notes.  With  an  amendment  exempting  from  repeal  the  provision 
for  free  banking,  this  bill  was  passed  in  the  House  and  went  to 
the  Senate.  That  body  amended  the  House  bill  so  as  to  make  it 
simply  a  bill  for  making  United  States  notes  receivable  in  payment 
for  the  four  per  cent  bonds  and  also  for  customs  duties,  and  finally 
passed  it  in  this  form  in  the  following  June  by  a  vote  of  45  to  15. 
But,  while  this  measure  was  pending  in  the  Senate,  and  in  view  of 
the  probable  disagreement  of  the  two  Houses,  the  mover  of 
the  House  bill  introduced  there  a  short  bill  to  forbid  the  further 
retirement  of  legal  tender  notes ;  and  this  was  hurriedly  passed 
through  both  House  and  Senate,  and  became  a  law  May  31,  1878 
(1877-1878,  ch.  146).  This  momentous  act,  which  finally  settled  the 
question  as  to  the  meaning  of  "  redemption  "  in  the  Resumption 


214 


ESSAYS 


Act  and  completed  the  conversion  of  the  United  States  notes  into 
a  permanent  currency,  —  an  act  scarcely  inferior  in  its  importance 
to  the  Resumption  Act  itself,  —  was  adopted  almost  without  debate. 
The  issue  at  that  moment  stood,  as  it  stands  at  present,  at 
$346,681,016. 

13.  The  reserve  of  gold,  accumulated  for  the  redemption  of 
legal  tender  paper  under  these  changed  conditions,  received  a 
tardy  recognition  from  Congress  in  1882,  when,  under  the  act  for 
extending  the  charters  of  the  national  banks,  it  was  provided  that 
the  issue  of  gold  certificates  by  the  Treasury  should  be  suspended 
"  whenever  the  amount  of  gold  coin  or  gold  bulHon  in  the  Treasury 
reserved  for  the  redemption  of  United  States  notes  falls  below  one 
hundred  millions  of  dollars  "  (i88i-i882,ch.  290,  §  12).  No  means 
of  replenishing  this  reserve  have  ever  been  provided,  except  those 
named  in  the  Resumption  Act,  —  surplus  revenues  and  bonds  of  the 
descriptions  authorized  by  the  Refunding  Act  (i  869-1 870,  ch.  256), 

14.  The  winter  of  1889  and  1890  brought  a  fresh  outburst  of 
agitation  for  the  free  coinage  of  silver,  at  a  time  when  the  compul- 
sory coinage  of  silver  dollars  under  the  Bland  Act  of  1878  was 
finally  submerging  the  Treasury.  The  result  of  several  months 
of  debate  in  Congress  was  the  passage  of  the  Silver  Purchase  Act 
of  1890,  by  which  Congress  required  the  purchase  of  4,500,000 
ounces  of  silver  per  month,  payment  therefor  to  be  made  in  "  coin 
notes,"  which  were  to  be  a  legal  tender  and  to  be  withdrawn  from 
circulation  only  when  replaced  by  an  equal  amount  of  the  silver 
dollars  ( 1 889-1 890,  ch.  708).  This  provision  for  adding  to  the  legal 
tender  paper  is  the  only  part  of  the  act  which  there  is  occasion  to 
consider  here.  The  reduction  of  legal  tender  circulation  had  been 
made  impossible  by  the  act  of  1878  ;  and  Congress  now  ordered  its 
periodical  increase,  by  such  an  amount  as  should  be  required  by 
the  stated  purchases  of  silver,  without  limit,  and  with  no  discre- 
tionary power  of  suspension  in  any  exigency.  It  was  declared  to 
be  the  policy  of  the  United  States  to  maintain  the  "  parity  "  of  gold 
and  silver ;  but  no  provision  was  made  for  an  increase  of  the  gold 
reserve  established  for  the  protection  of  the  United  States  notes, 
in  case  "  parity "  meant  the  maintenance  of  the  gold  standard. 
It  was  provided  on  the  other  hand  that  the  coin  notes  might  be  re- 
deemed in  silver  at  the  pleasure  of  the  Secretary,  so  that  the  decUne 
to  the  silver  standard  appeared  to  be  a  matter  of  probable  ultimate 


THE   SAFETY   OF   THE   LEGAL   TENDER   PAPER  215 

necessity.  The  new  measure  was,  therefore,  a  surprising  sequel 
to  the  long  effort  made  to  place  the  legal  tender  notes  on  the  solid 
footing  of  gold. 

15.  Not  many  months  had  passed  before  the  saturation  of  the 
currency  with  legal  tender  paper  and  silver  was  proved  by  the 
slackening  of  gold  payments  for  customs  duties.  In  the  spring  of 
1893  the  new  coin  notes  outstanding  had  risen  to  1^140,000,000, 
and  the  increase  then  going  on  was  not  far  short  of  ^4,000,000  per 
month ;  gold  receipts  at  New  York  were  nearly  dried  up,  and  the 
gold  reserve  in  the  Treasury  was  falling  below  the  prescribed 
;^  100,000,000.  The  visible  danger  of  the  suspension  of  gold  pay- 
ments precipitated  the  violent  monetary  panic  which  culminated 
in  July.  Congress  was  called  together  in  August  to  provide  the 
means  of  financial  safety,  and  the  repeal  of  the  clause  in  the  act  of 
1890  requiring  the  purchase  of  silver  was  carried,  after  a  parlia- 
mentary contest  which  lasted  for  eighty-two  days  (1893,  ch.  8). 

These  are  the  leading  points  in  the  history  of  a  currency  now 
old  enough  to  have  had  its  trial  in  every  variety  of  national  for- 
tune, —  in  prosperity  and  in  adversity,  in  war  and  in  peace.  As 
an  exhibition  of  unsteady  purpose,  the  record  appears  to  me  to  be 
without  a  parallel,  considering  the  gravity  of  the  subject-matter. 
This  is  the  manner  in  which  the  nation  has  dealt  with  the  paper 
legal  tender  which  practically*  lies  at  the  base  of  the  great  mass  of 
its  credit  transactions,  —  used  concurrently  with  gold  no  doubt  at 
present,  but  for  many  years  used  almost  exclusively,  and  possibly 
in  some  contingency  destined  to  be  so  used  again.  The  customary 
paper  circulation,  which  should  rest  on  a  bed-rock  of  law  as 
unchangeable  as  anything  of  human  institution  can  be,  has  lain 
upon  a  quicksand.  Instability  has  been  the  leading  characteristic 
of  our  legislation  on  this  subject  for  a  third  of  a  century. 

If  we  consider  the  course  pursued  by  the  other  leading  nations 
in  their  management  of  currency  and  kindred  matters,  the  contrast 
is  remarkable.  England  has  made  no  important  change  in  her 
currency  system  for  over  fifty  years,  and,  notwithstanding  the 
inviting  field  which  it  presents  for  the  reformer,  still  prefers  not  to 
risk  her  reputation  for  absolute  safety  upon  possible,  but  still  un- 
certain, improvements.  France  has  kept  her  system  without  sub- 
stantial change,  except  in  the  scale  of  its  operations,  ever  since  the 


2l6  ESSAYS 

absorption  of  the  departmental  banks  by  the  Bank  of  France  in 
1848.  The  war  with  Germany,  suspension  of  specie  payments, 
revolution,  invasion,  and  defeat  tried  the  strength  of  her  legisla- 
tion and  of  her  confidence  in  it ;  but  it  stands  to-day  nearly  as  it 
stood  before  1870,  except  for  the  legal  tender  power  then  given  to 
the  notes  of  the  Bank  of  France.  Germany  laid  her  course  in  her 
coinage  and  bank  acts  of  1871  to  1875,  and  has  followed  it  from 
that  day  without  deviation,  her  occasional  legislation  upon  this 
subject  being  directed  steadily  to  the  completion  of  the  system  as 
originally  planned.  These  nations  now  have  an  unfaihng  confi- 
dence in  the  steadiness,  permanence,  and  soundness  of  their  own 
monetary  arrangements ;  and  a  chief  element  in  that  confidence 
is  the  certainty  that  serious  change  is  not  within  the  range  of 
probability. 

This  contrast,  though  still  disadvantageous,  would  be  less  pain- 
ful if  in  the  rapid  succession  of  changes  made  by  our  government 
there  were  discernible  any  approach  to  continuity  of  purpose.  A 
consistent  policy  might  be  developed  or  a  system  might  grow  up 
by  a  succession  of  short  stages,  and  the  wisdom  of  the  process 
might  be  justified  as  regards  its  intention,  if  not  as  regards  its  skill. 
But  no  such  continuity  is  to  be  found  in  the  series  of  measures 
recapitulated  above.  Fundamental  principles  are  adopted  at  one 
time  and  abandoned  at  another.  The  automatic  absorption  of 
notes  by  bonds,  their  systematic  retirement  and  cancellation  by  the 
discretionary  authority  of  the  Treasury,  the  payment  of  them  as  a 
debt,  the  idea  of  fixity  of  amount,  and  that  of  an  adequate  reserve 
in  proportion  to  the  amount,  —  such  conceptions  as  these  have 
been  held  for  a  time,  then  dropped,  then  succeeded  by  others,  per- 
haps equally  short-lived.  The  series  of  acts,  as  a  whole,  points  to 
no  particular  end,  its  several  parts  have  no  systematic  tendency  or 
common  direction.  The  steps  taken  have  been  without  logical 
order,  and  the  important  consequences  following  have  often  been 
neither  expected  nor  desired.  The  line  traced  by  these  measures 
is  in  fact  a  legislative  zigzag,  not  a  line  of  development. 

When  we  inquire  for  the  cause  of  such  a  mortifying  result  from 
thirty-five  years  of  constantly  renewed  financial  anxiety  and  debate, 
we  must  find  it  in  the  general  absence  of  any  sense  of  responsibility 
for  the  formation  and  maintenance  of  a  consistent  policy.  Not 
many  of  our  Secretaries  of  the  Treasury  have  found  it  worth  while 


THE    SAFETY   OF   THE   LEGAL   TENDER   PAPER  217 

to  plan  and  act  for  any  distant  future,  they  knowing  well  that 
executive  initiative  counts  for  but  little  in  the  end ;  and,  moreover, 
whatever  secretaries  may  desire,  no  Congress  can  be  relied  upon 
to  carry  out  the  purposes  of  a  predecessor.  Inspection  of  the  list 
of  acts  shows  that  usually  some  accidental  conjuncture  or  some 
supposed  popular  demand  has  been  the  real  spring  of  action  in 
each  case,  and  that  for  the  individual  legislator  a  supposed  man- 
date for  the  passing  moment  has  generally  been  enough  to  dis- 
charge him  from  all  personal  responsibility. 

Consistency  in  the  popular  demand  is  not  a  characteristic  of 
our  politics.  The  American  people  can  be  rehed  upon  with  confi- 
dence in  a  sufficiently  alarming  crisis,  finally  and  after  great  tra- 
vail, to  rally  in  support  of  the  honest  and  wise  course  in  any 
matter  of  high  policy ;  but  this  result  is  often  reached  only  after  a 
season  of  painful  doubt  and  seeming  vacillation,  and  after  much 
mischief.  The  last  year,  for  example,  witnessed  the  latest  of  a 
series  of  occasional  appeals  to  the  sound  common  sense  of  the 
plain  people,  in  which  the  result  was  fortunate,  to  be  sure,  and  em- 
phatic, but  was  obviously  too  long  left  in  uncertainty.  How  should 
we  expect  the  sense  of  legislative  responsibility  for  a  continuous 
course  of  action  to  be  developed  under  such  conditions  ?  How 
can  we  wonder  that  the  congressman  is  too  anxiously  mindful  of 
the  shifting  mass  of  opinion  behind  him,  on  which  his  political 
future  depends,  to  resist  the  passing  demand  for  change  ?  Or  why 
should  our  financial  legislation  be  less  changeable  and  inconsistent 
than  our  tariff  legislation,  in  which  we  are  now  expecting  the  third 
radical  alteration,  not  to  say  revolution,  effected  in  the  space  of 
seven  years  .-" 

Is  it  even  surprising  that,  on  the  whole,  the  net  result  of  con- 
flicting financial  acts  should  be  a  general  weakening  of  our  system 
and  a  loosening  of  the  grip  upon  hard  money?  The  fact  is  in- 
dubitable. For  proof  of  it  we  need  only  compare,  first,  the  condi- 
tion of  things  in  1865,  when  there  was  a  general  consensus  of 
opinion  that  the  return  to  specie  payment  was  a  manageable  prob- 
lem for  early  solution;  second,  the  condition  in  1875,  when,  after 
a  year  of  painful  tergiversation,  a  Resumption  Act  was  finally 
carried  through  in  deference  to  a  manifest  public  opinion,  although 
by  means  of  an  agreement  that  its  terms  should  be  unintelligible ; 
and,  third,  the  recent  state  of  affairs,  when  the  country  has  repeat- 


2i8  "      ESSAYS 

edly  found  itself  brought  dangerously  near  the  verge  of  a  fresh 
suspension,  and  has  still  found  it  impossible  to  obtain  a  line  of 
legislation  demanded  for  the  better  protection  of  the  national  honor 
and  well-being.  The  reason  for  this  irregular,  but  on  the  whole 
progressive,  relaxation  on  the  side  of  political  morals,  at  the  same 
time  that  we  have  secured  specie  payment,  is  not  far  to  seek.  In 
any  debate  where  the  fateful  words  "  contraction  "  and  "  relief  " 
are  heard,  the  fears  and  demands  of  a  sufficiently  noisy  minority 
have  extraordinary  potency,  especially  in  the  even  years  which 
witness  the  national  elections  ;  and  ground  once  lost  by  any  weak- 
ness in  this  part  of  the  field  of  politics  is  regained  with  great  dif- 
ficulty. The  country  is  now  and  then  roused  to  the  fact  that  it  is 
slipping  down  a  dangerous  declivity ;  but,  after  all,  even  under  a 
government  of  and  for  and  by  the  people,  it  is  not  always  easy  for 
the  clear  will  of  the  majority  to  find  expression  in  law. 

It  is  not  to  be  assumed  that  the  cause  of  this  legislative  inca- 
pacity to  deal  firmly  with  a  subject  of  the  gravest  importance  is  to 
be  found  in  special  defects  of  character,  intellectual  force,  or  proper 
purpose  among  the  men  who  make  up  the  Congress  of  the  United 
States.  The  parliamentary  bodies  in  other  countries  as  well  as  our 
own  suffer  from  the  follies  of  individual  members,  often  fail  to  do 
their  duty,  and  are  the  objects  of  criticism  and  satire.  Under  their 
forms  of  parliamentary  government,  however,  they  are  in  a  meas- 
ure protected  from  what  might  prove  to  be  their  own  incapacity, 
—  sometimes  by  traditional  modes  of  procedure,  sometimes  by  posi- 
tive rules,  and  generally  by  established  forms  of  political  organiza- 
tion and  leadership.  Without  the  defences  of  this  kind  which  time 
and  habit  have  thrown  around  the  House  of  Commons,  that  body 
might  easily  find  its  action  as  much  a  matter  of  chance,  and  as 
little  to  be  relied  upon  under  the  strain  of  an  unsettled  public 
opinion,  as  that  of  the  House  of  Representatives.  Add  to  the 
differences  in  customary  procedure  the  fact  that  it  is  our  usual 
practice  to  elect  to  Congress  no  one  who  is  not  a  resident  of  the 
district  to  be  represented, — so  that  disagreement  with  local  opin- 
ion often  means  for  the  member  not  merely  failure  at  a  new  elec- 
tion, but  political  death,  —  and  there  are  reasons  enough  why 
Congress  should  have  failed  so  conspicuously  to  frame  and  defend 
any  consistent  line  of  policy  as  to  the  paper  currency. 

A  few  words  should  also  be  said  here  as  to  a  phase  of  popular 


THE    SAFETY   OF   THE   LEGAL   TENDER    PAPER  219 

opinion  with  which  members  of  Congress  have  long  had  to  reckon, 
—  a  phase  of  opinion  singularly  persistent  and  general,  showing 
itself  in  an  extreme  dread  of  "contraction."  The  long  deprecia- 
tion following  the  great  issues  of  United  States  notes  during  the 
war  impressed  upon  the  public  mind  the  consequences  of  inflation, 
so  deeply  that  the  lesson  is  nearly  as  vivid  to-day  as  it  was  thirty 
years  ago.  The  majority,  no  doubt,  have  a  wholesome  dread  of 
any  tendency  in  that  direction ;  and  a  minority,  perhaps,  desire 
such  a  tendency  in  some  form  or  other,  with  more  or  less  crude 
notions  as  to  controlling  the  results.  But,  whether  resisting  infla- 
tion or  favoring  it,  the  great  mass  of  our  people  clearly  have  a 
strong  belief  in  the  effect  of  quantity  upon  the  value  of  a  circula- 
tion ;  and  this  appears  to  make  up  the  greatest  part  of  their  simple 
creed  as  to  money.  To  hold  the  currency  where  it  is  becomes  the 
ideal  of  steady  management ;  and  contraction  becomes  an  evil  in 
itself,  and  perhaps  more  dreaded  even  than  inflation,  because  its 
earlier  stages  are  more  painful. 

The  dread  of  contraction  was  the  one  argument  against  resump- 
tion which  had  any  strength  with  the  public ;  and  it  has  not  lost  its 
power  since,  although  we  plainly  have  the  whole  world  upon  which 
to  draw,  if  our  own  supply  is  below  our  needs.  A  morbid  anxiety 
as  to  the  sufficiency  of  the  currency  to-day  possesses  the  public 
mind,  as  is  shown  by  the  copious  statistics  with  which  the  govern- 
ment publications  constantly  strive  to  reassure  the  people,  and  by 
the  frequent  efforts  of  Presidents  and  Secretaries  to  satisfy  public 
opinion  as  to  the  care  with  which  the  supply  of  currency  is  insured. 
No  other  country  of  importance  shows  this  hypochondriac  anxiety 
as  to  its  symptoms,  or  gives  a  tithe  of  the  attention  given  by  ours 
to  the  mere  quantity  of  its  money ;  and  no  one  of  the  leading  com- 
mercial countries,  it  must  be  said,  is  either  so  favored  by  fortune  or 
so  constantly  in  trouble  in  this  respect.  But  our  excessive  sensi- 
tiveness on  this  point  is  obstinate  :  it  has  apparently  been  increased 
by  the  course  of  the  discussion  as  to  silver,  and  we  are  still  abso- 
lutely unwilling  to  trust  to  the  operation  of  natural  laws  for  the 
adjustment  of  the  amount  of  our  active  currency. 

The  necessary  conclusion  from  our  experience  with  the  legal 
tender  notes  plainly  is  that  a  government  currency,  under  our 
conditions,  is  an  unfit  subject  for  national  legislation.  Many  sub- 
jects required  legislation  in  the  heat  of  civil  war  which  are  recog- 


220  ESSAYS 

nized  as  having  no  place  in  time  of  peace ;  many  powers  were  then 
called  into  use,  from  stern  necessity,  which  have  been  laid  aside, 
like  disused  weapons  consigned  to  the  arsenal.  A  system  which 
makes  the  usual  legal  tender  of  the  country  a  subject  of  current 
legislation  risks  too  much  upon  the  chances  of  mistake,  attack,  and 
uncertainty.  It  is  a  familiar  and  useful  practice  in  our  legislative 
bodies  to  recognize  some  subjects  as  fitted  for  treatment  by  general 
laws,  in  order  that  they  may  be  freed  from  the  uncertainties  and 
may  not  add  to  the  temptations  which  beset  the  work  of  every 
legislature.  The  case  of  the  paper  currency  of  the  country  is 
analogous  to  this,  in  that  for  safety  it  requires  to  be  placed  upon 
such  a  basis  as  shall  reduce  to  the  minimum  the  chances  of  its 
coming  up  for  action  and  shall  prevent  a  constantly  recurring 
anxiety  as  to  its  future. 

What  happens  with  a  paper  legal  tender  is  far  different  from 
the  course  of  legislation  as  to  the  legal  tender  coin.  With  regard 
to  the  latter  the  government  fixed  its  standard  and  established  its 
system  of  coinage  in  1792,  and  then  found  at  the  most  only  two 
occasions  for  legislation  as  to  other  matters  than  mere  detail,  until 
the  silver  question  presented  itself  in  1878.  But  the  paper  legal 
tender  never  has  been,  and  it  is  safe  to  say  never  can  be,  put  upon 
a  basis  where  it  can  have  a  like  course  of  freedom  from  change. 
Resting  purely  upon  credit,  and  regarded  as  a  creation  of  money  by 
mere  act  of  Congress,  it  steadily  invites  alteration,  the  removal  of 
this  limit  or  that,  the  increase  of  its  amount,  or  the  alteration  of  its 
coin  basis.  The  reserve  to  be  held  in  the  Treasury  under  any  safe 
adjustment  can  never  fail,  from  its  magnitude,  to  attract  the  covet- 
ous gaze  of  the  schemers  who  throng  around  the  great  source  of 
government  bounty.  In  addition  to  these  risks  to  which  the  paper 
legal  tender  is  exposed,  it  has  also  to  meet  those  arising  from  the 
silver  controversy  now  threatening  the  coin.  It  was  well  rec- 
ognized six  months  ago  that  in  the  event  of  Mr.  Bryan's  elec- 
tion the  legal  tender  paper  might  be  suddenly  lowered  to  the 
silver  standard,  by  the  mere  substitution  of  silver  redemption  for 
gold,  and  by  mere  executive  order.  It  is  not  fit  that  the  paper 
currency  of  the  country  should  thus  be  kept  adrift,  or  that  the 
people  of  the  country  should  be  called  upon  periodically  to  rally 
for  the  safety  of  something  which  fails  of  one  of  its  main  purposes 
if  it  is  not  kept  free  from  any  suspicion  of  danger. 


THE   SAFETY   OF   THE   LEGAL   TENDER   PAPER  221 

The  passage  of  the  Silver  Purchase  Act  of  1890  is  a  striking 
illustration  of  the  peril  of  the  present  situation.  Two  explanations 
have  been  given  of  the  causes  which  united  a  majority  of  both 
Houses  in  favor  of  an  act  which  proposed  a  steady  dilution  of  the 
paper  currency,  involving  the  ultimate  suspension  of  gold  payments 
and  final  degradation  of  our  standard  to  the  level  of  silver.  One 
explanation,  current  at  the  time  and  long  afterwards,  was  to  the 
effect  that  a  majority  of  both  Houses  favored  the  free  coinage 
of  silver,  that  President  Harrison  could  not  be  relied  upon  to  veto 
a  bill  framed  for  that  purpose,  and  that  the  insane  "  experiment " 
of  buying  the  domestic  product  of  silver  by  new  issues  of  paper 
was  resorted  to  as  a  compromise,  in  dread  of  a  more  rapidly 
working  measure  and  one  which  would  leave  no  locus  petiiten- 
tiae.  The  other  explanation  —  given  in  the  Senate  nearly  a  year 
ago  by  Senator  Teller  —  was  to  the  effect  that  the  Silver  Pur- 
chase Act  was  the  consideration  for  which  the  silver  interest, 
holding  the  balance  of  power  in  the  Senate,  was  induced  to  give 
its  support  to  the  Tariff  Act  of  1890,  then  on  its  passage.  This 
statement  of  the  transaction,  made  by  one  who  did  not  hesitate 
to  declare  himself  one  of  the  contracting  parties  in  the  case,  has 
the  greater  intrinsic  probability ;  but,  be  that  as  it  may,  let  the  one 
account  or  the  other  be  the  correct  statement,  it  is  true  in  either 
case  that  legislature  and  executive  were  alike  ready  to  cut  the 
paper  currency  adrift  from  the  solid  standard  and  to  let  it  float 
towards  depreciation.  In  the  one  case  this  would  be  for  the 
reason  that  a  sound  currency  was  doomed  in  any  event ;  and  in 
the  other  case  for  the  reason  that  neither  Congress  nor  President 
regarded  its  sacrifice  as  anything  more  than  a  proper  makeweight, 
to  be  thrown  in  for  the  sake  of  securing  a  higher  scale  of  customs 
duties. 

Is  there  another  country  in  the  world,  outside  of  South  America, 
in  which  a  paper  legal  tender,  with  all  the  possibilities  implied  in 
its  misuse,  would  be  dealt  with  in  this  fashion }  The  election  of 
1896  and  all  that  has  followed  inspires  confident  hope  of  a  less 
troubled  future ;  but,  after  all,  what  guarantee  have  we  that  the 
amazing  defection  of  1890  may  not  be  repeated  within  half  a  dozen 
years  ?  Such  an  untoward  result  would  mean  no  greater  revolu- 
tion than  that  which  took  place  in  the  half-dozen  years  ending  with 
1890 :  indeed,  it  maybe  doubted  whether  in  the  minds  of  most  men 


222  ESSAYS 

the  assurance  of  safety  is  not  sensibly  weaker  now  than  it  was 
before  that  year. 

The  case  of  1890  shows  the  peril  that  may  come  from  positive 
action  by  Congress,  and  the  last  three  years  have  shown  with  equal 
distinctness  the  dangers  to  be  feared  from  its  inaction.  Since  the 
beginning  of  1894  there  has  been  a  necessity  for  the  periodical 
replenishment  of  the  gold  reserve.  Withdrawals,  sometimes  for 
export  and  sometimes  from  precaution,  have  brought  the  stock  of 
gold  down  to  the  danger  point ;  and  it  has  been  filled  up  by  the 
proceeds  of  successive  loans,  amounting  to  over  $260,000,000.  It 
is  immaterial  whether  the  cause  of  this  steady  borrowing,  for  the 
payment  of  a  debt  which  is  not  thereby  diminished,  is  to  be  found 
in  what  has  been  called  the  "  endless  chain  "  of  notes  redeemed, 
reissued,  again  redeemed  and  again  issued,  or  is  to  be  found  in  a 
deficiency  of  revenue.  In  either  case  the  evil  was  flagrant,  and  it 
was  the  business  of  Congress  to  apply  an  appropriate  remedy,  — 
by  fresh  taxation  in  the  one  case,  or  by  modifying  the  system  of 
reissue  under  the  act  of  1878  in  the  other.  But  it  will  be  within 
the  recollection  of  every  reader  that  Congress  found  itself  abso- 
lutely unable  to  act.  Four  times  the  necessity  for  borrowing  has 
presented  itself,  with  a  suspension  of  gold  payments  as  the  only 
alternative.  On  three  occasions  out  of  the  four  Congress  was  in 
session  at  the  critical  moment ;  but  it  uniformly  appeared  that  action 
was  out  of  the  question.  Grant  that  the  responsibility  for  failure 
lay  with  a  factious  few  and  not  with  the  majority,  and  the  fact  still 
remains  that  the  Congress  of  the  United  States  was  unable  to  act 
in  an  emergency  created  by  its  own  legislation.  It  was  even  unable 
to  apply  the  palliative  of  providing  for  the  issue  of  shorter  bonds, 
bearing  a  lower  rate  of  interest  than  those  to  be  issued  under  the 
act  of  1870,  a  bill  for  that  purpose  passed  by  the  House  in  1896 
having  been  converted  by  the  Senate  into  a  bill  for  the  free  coinage 
of  silver.  For  three  years,  therefore,  the  credit  of  the  government 
and  the  standard  of  prices  and  payments  have  remained,  not  with- 
out defence,  —  for  the  executive  still  performed  its  duty  with  the 
means  afforded  by  the  half-forgotten  provision  in  the  Resumption 
Act,  —  but  so  shaken  at  intervals  as  to  cause  constant  dread,  some- 
times nearly  degenerating  into  panic. 

A  currency  which  is  exposed  to  such  dangers  as  these  cannot 
be  called  safe  in  any  proper  sense  of  the  word.     The  wealth  of 


THE    SAFETY   OF   THE    LEGAL   TENDER    PAPER  223 

the  promisor  of  the  note  is  unspeakable,  but  from  time  to  time  the 
application  of  that  wealth  in  fulfilment  of  the  promise  is  not  beyond 
question.  The  power  to  enforce  the  legal  tender  of  the  note  at  its 
face  in  payment  of  debt  is  absolute,  but  the  standard  of  its  value 
has  never  been  made  secure.  For  thirty-five  years  the  policy  of  the 
law  in  regard  to  this  currency  has  been  uncertain,  and  the  causes 
of  this  uncertainty  have  gained  in  strength  and  multiplied  as  time 
has  gone  on.  One  ingenious  expedient  and  another  is  suggested 
for  regulating  the  use  and  redemption  of  the  notes,  in  the  hope  of 
giving  them  steadiness  and  securing  somewhere  a  power  of  con- 
trol; but  there  is  no  escape  from  the  fatal  objection,  that  the  direct 
power  of  legislation  is  not  only  paramount  but  is  beyond  the  con- 
trolling force  of  any  steady  political  influence.  In  short,  not  only 
is  there  no  guarantee,  but  there  is  no  probability  that  the  history 
of  these  issues,  if  they  continue  for  another  generation,  will  be  any 
less  checkered  than  it  has  been  in  the  last.  Without  dwelling  upon 
such  forebodings,  however,  it  is  enough  to  say  here,  that  while  the 
very  foundation  of  all  credit  is  thus  left  doubtful  neither  the  credit 
of  the  nation  nor  that  of  the  mass  of  its  citizens  can  reach  its 
proper  strength.  None  can  profit  by  such  uncertainty  except 
those  whose  command  of  wealth  enables  them  to  secure  them- 
selves, at  the  expense  of  others,  against  the  hazards  of  the  future. 

The  necessary  alternative  to  the  issue  of  paper  currency  by  the 
government  is  the  delegation  of  this  function  to  banks  and  the 
complete  substitution  of  private  credit  for  public  as  the  medium 
of  exchange  in  domestic  operations.  A  large  proportion  of  these 
operations  are  already  performed  by  means  of  bank  credit,  with 
an  adjustment  to  the  needs  of  the  day  which  is  nearly  automatic; 
and  the  only  relief  from  the  increasing  perils  of  the  present  situa- 
tion is  to  be  found  in  the  same  direction.  This  reliance  upon 
banks  would  not,  necessarily,  mean  the  absorption  of  the  whole 
right  of  paper  issue  by  the  national  banks,  although  this  absorp- 
tion would  have  much  to  recommend  it ;  but  it  would  clearly  imply 
the  confinement  of  the  right  to  banks  working  under  tolerably  uni- 
form conditions,  as  the  guarantee  of  their  safety  and  wide  credit, 
and  therefore  presumably  under  some  kind  of  national  regulation 
and  supervision. 

Even  with  the  use  of  bank-notes,  then,  the  paper  currency 
must  continue  to  be  a  subject  of  national  legislation.     There  is, 


224  ESSAYS 

however,  an  important  distinction  in  the  kind  of  legislation  called 
for  by  government  paper  and  by  bank  paper  respectively,  and 
a  great  difference  in  the  risks  to  which  we  may  be  exposed  in  the 
two  cases.  Congress  has  had  the  national  bank  system  before  it, 
for  any  necessary  legislation,  for  almost  the  same  length  of  time 
as  the  legal  tender  issues ;  but  the  course  of  action  in  the  two 
cases  offers  no  point  of  resemblance.  Inconsistent  and  essentially 
weak  as  the  dealing  of  Congress  with  the  legal  tender  issues  has 
been,  its  legislation  as  to  the  banks  has  on  the  whole  been  marked 
by  steady  purpose,  has  tended  to  complete  the  original  system, 
and  as  a  general  result  has  materially  strengthened  it.  Deserv- 
edly or  not,  the  banks  have  from  the  start  had  abundance  of  ene- 
mies, in  Congress  and  out  of  it ;  but  the  bank  legislation,  if  not 
uniformly  wise,  has  been  sparing  in  amount  and  usually  directed 
to  the  details  rather  than  the  general  structure  and  credit  of  the 
system.  Comparison  shows  clearly  that  for  thirty  odd  years  the 
legislator  has  approached  bank  questions  from  an  entirely  different 
point  of  view  and  in  a  different  frame  of  mind  from  that  which  has 
led  him  to  such  unfortunate  results  in  acting  upon  legal  tender 
notes.  He  has  not  felt  the  same  temptations,  he  has  not  been 
under  the  same  outside  influences,  the  pressure  of  the  times  has 
not  turned  his  thoughts  in  the  same  direction.  The  fundamental 
difference  in  the  two  cases  is  no  doubt  explained  by  La  Roche- 
foucauld's famiUar  maxim,  that  "  it  is  easier  to  be  wise  for  others 
than  to  be  wise  for  one's  self."  The  legislator  has  found  it  con- 
genial and  easy  to  hold  others  to  the  strict  line  of  their  obligations 
and  of  sound  pubhc  policy,  but  not  so  easy  to  observe  this  line 
in  deciding  as  to  what  lay  within  his  own  hand.  His  greatest 
folly  in  dealing  with  the  banks  —  the  absurd  attempt,  made  by 
Congress  in  1881  and  foiled  by  the  veto  of  President  Hayes,  to 
force  a  reduction  of  the  interest  of  bonds  held  by  the  banks  —  was 
after  all  not  a  measure  of  relaxation  towards  them,  but  one  of 
severity. 

This  natural  tendency  of  Congress,  considered  merely  as  a 
collection  of  human  beings,  to  exact  more  from  others  than  from 
themselves,  is  undoubtedly  strengthened  by  the  kind  of  presump- 
tion established  in  the  popular  mind  to  the  disadvantage  of  any 
corporation,  in  questions  of  responsibility  or  of  seeming  conflict 
of  interest.     The  national  banks  have  felt   the  pressure    of    this 


THE   SAFETY   OF  THE   LEGAL   TENDER   PAPER  22$ 

influence  against  them,  in  cases  where  they  have  sought  for  changes 
of  legislation  which  would  have  been  for  the  general  advantage. 
No  doubt  in  such  cases  impartiahty  of  judgment  would  better  have 
befitted  the  legislator  than  unfavorable  prepossession  ;  but,  after 
all,  can  it  be  doubted  that  the  disposition  to  say  "  No  "  has  had  an 
important  place  among  the  causes  for  the  general  steadiness  of  our 
bank  legislation  ?  To  hold  the  banks  to  their  obligation  and  to 
grant  them  few  favors  has  been  the  rule,  and  the  existence  of  any 
rule  analogous  to  this  in  deaHng  with  the  legal  tender  issues  would 
have  given  an  entirely  different  cast  to  that  unfortunate  chapter  of 
our  history. 

The  nations  already  referred  to  as  able  to  manage  their  curren- 
cies successfully  and  quietly  have  all  done  this  by  delegating  the 
power  of  issue  to  banks.  They  have  established  their  banks  on 
different  principles,  but  have  agreed  in  the  general  policy  of  throw- 
ing upon  them  certain  duties  and  restricting  the  field  of  probable 
legislation.  That  their  systems  have  a  remarkable  steadiness  and 
permanence  has  already  been  pointed  out.  These  systems  they 
also  strengthen,  as  time  goes  on,  not  so  much  by  legislation  as  by 
practice,  by  public  opinion,  and  by  the  estabhshment  of  traditions 
of  duty  on  the  part  of  the  banks  themselves.  Both  in  England 
and  in  France  the  legislative  power  takes  distinctly  the  attitude  of 
observation,  towards  an  establishment  which  is  conducted  for 
private  profit,  but  is  intrusted  with  a  quasi  public  function.  In 
Germany  the  imperial  control  of  the  Reichsbank  makes  the  rela- 
tion somewhat  different,  and  yet  a  note  circulation  of  remarkable 
stability  has  been  built  up  there  on  the  basis  of  private  capital 
invested  in  order  to  earn  a  profit.^  In  neither  one  of  the  three 
countries  does  the  regulation  of  the  currency  present  itself  as  a 
subject  for  ordinary  legislation. 

But  it  is  not  necessary  for  the  present  discussion  to  enter  upon 
the  general  considerations  for  or  against  a  paper  currency  consist- 
ing of  bank-notes  alone  ;  and  I  shall  only  call  attention  here,  in 
conclusion,  to  the  often-repeated  argument  that  a  government  issue, 
being  a  loan  without  interest,  results  in  a  saving  to  the  Treasury 

^  There  are  still  outstanding  in  Germany  imperial  treasury  notes  (not  made  a  legal 
tender)  to  the  amount  of  120,000,000  marks,  remaining  from  the  larger  issue  made  in 
1875  to  replace  the  notes  of  the  several  German  states.     But  this  exception  to  what  is 
said  above  is  not  important. 
Q 


226  ESSAYS 

which  is  lost  when  the  right  of  circulation  is  delegated  to  banks. 
The  experience  of  the  United  States  in  the  last  five  years  alone 
presents  a  complete  answer  to  this  penny-wise  reasoning.  In  that 
space  of  time  the  people  of  the  United  States  have  lost  by  shaken 
confidence,  discouraged  enterprise,  and  the  actual  ruin  of  thousands 
of  citizens,  resulting  from  the  mismanagement  of  their  currency, 
an  amount  beyond  all  comparison  with  the  annual  saving  of  per- 
haps $12,000,000  made  by  them  at  the  Treasury.  The  thrill  of 
alarm  which  runs  through  the  country  whenever  the  gold  reserve 
dips  too  far  below  the  line,  or  when  there  is  delay  or  doubt  in 
applying  the  costly  remedy,  means  a  loss  to  the  people  to  be 
measured  only  by  scores  of  millions.  The  monetary  panic  of  1893 
alone,  by  its  direct  results  and  without  reference  to  the  stagnation 
which  followed  it,  was  enough  to  counterbalance  all  savings  of 
interest  made  by  the  Treasury  in  the  last  twenty  years. 

But  the  question  as  to  the  means  of  securing  the  safest  paper 
currency  is  one  in  which  the  consequences  to  the  national  industry 
and  prosperity  are  on  a  scale  so  vast  that  any  attempt  at  pecuniary 
measurement  appears  irrelevant,  —  as  irrelevant  as  it  would  be  to 
draw  from  the  post-office  deficit  a  conclusion  as  to  the  maintenance 
of  the  postal  service  by  our  people.  No  such  calculations  are 
needed  to  show  that  our  people  cannot  afford  to  rest  content  with 
a  system  which  their  experience  for  a  generation  has  shown  to  be 
radically  unsafe.  So  long  as  such  a  system  continues,  its  history 
must  continue  to  repeat  itself.  Errors  made  in  the  past  will  be 
made  also  by  the  new  men  in  the  future  ;  and  the  possibility  that, 
in  any  moment  of  popular  discouragement  or  passing  delusion, 
some  fresh  experiment  or  abandonment  of  wholesome  limitation 
may  be  resolved  upon  in  haste,  but  with  irreparable  results,  must 
continue  to  be  a  standing  menace  to  our  credit,  public  and  private. 


THE   NATIONAL   BANKING   SYSTEM  i 

Of  the  constituents  of  our  paper  currency  the  government 
notes  are  amply  shown  by  the  history  of  the  last  thirty  years  to 
be  the  dangerous  element.  Experience  has  shown  that  we  can 
rely  upon  no  principle  or  policy  as  a  safeguard  against  the  caprice 
or  the  temptation,  which  at  intervals  must  surely  beset  any  legis- 
lative body  having  control  of  the  direct  issue  of  paper.  The 
bank-notes,  on  the  other  hand,  have  been  jealously  guarded  and 
strengthened  by  legislation,  until  they  resemble  a  government 
issue  resting  upon  a  special  fund  of  cash  and  securities  rather 
than  the  promises  of  corporations.  In  their  case  the  present  need 
of  reform  is  not  the  result  of  excess  or  of  insecurity.  Their  in- 
crease is  under  heavy  restraint,  and  they  are  as  secure  as  the  credit 
of  the  government  can  make  them.  Their  grand  defect  is  want 
of  adaptation  to  the  proper  business  of  banking,  which  limits  their 
usefulness  in  some  parts  of  the  country  and  makes  them  practi- 
cally unavailable  for  issue  in  others. 

The  framers  of  the  bank  acts  of  1863  and  1864,  which  have 
become  Title  LXII.  of  the  Revised  Statutes,  had  their  attention 
fixed  chiefly  on  the  provision  of  a  paper  currency  of  uniform  value 
throughout  the  United  States,  which  should  absorb  by  permanent 
investment  a  certain  amount  of  United  States  bonds,  and  should 
become  the  sole  paper  currency  of  the  future.  Indeed,  the  title  of 
each  act,  "  An  Act  to  provide  a  National  Currency,  secured  by  the 
pledge  of  United  States  stocks  [or  bonds],  and  to  provide  for  the 
Circulation  and  Redemption  thereof,"  sufficiently  shows  the  point 
of  view  from  which  these  measures  were  regarded.  The  provi- 
sions as  to  the  general  business  of  banking  were,  no  doubt,  greatly 
in  advance  of  those  existing  in  many  states ;  but,  after  all,  it  was 
the  issue  of  notes  upon  a  secure  basis  which  interested  Congress 
and  the  public  at  the  time,  and  has  continued  to  be  a  leading  con- 

1  Quarterly  Journal  of  Economics,  October,  1897. 
227 


228  ESSAYS 

sideration  in  national  legislation  on  this  subject  ever  since.  Per- 
haps the  failure  of  the  national  system  to  meet  the  wants  of  large 
sections  of  country  might  not,  even  now,  have  secured  the  atten- 
tion which  it  deserves,  had  not  the  provision  for  the  safety  of  the 
notes  finally  undermined  the  issue  and  threatened  its  extinction. 
The  inability  of  the  system  as  it  stands  to  perform  steadily  and 
satisfactorily  its  chief  duty  of  supplying  the  business  of  the  coun- 
try with  a  safe  and  adequate  currency,  has  finally  brought  the 
whole  subject  of  banking  under  discussion,  and  has  raised  the 
question  as  to  the  proper  coordination  of  issue  with  the  other 
functions  of  banks,  in  a  more  radical  form  than  for  thirty  years 
before. 

Although  the  purpose  of  this  paper  is  to  consider  some  of  the 
points  at  which,  in  the  judgment  of  the  writer,  the  national  banking 
system  has  proved  to  be  badly  adapted  to  the  present  needs  of  the 
country,  the  writer  must  premise  that  the  national  system  appears 
to  him  to  be  the  foundation  on  which  any  reform  of  our  bank-note 
currency  must  necessarily  stand.  Experience  under  that  system 
has  shown  plainly  the  gain  secured  by  uniformity  of  regulation 
and  unity  of  supervision.  There  is  no  question  that  the  national 
banks  find  their  credit  in  every  form  strengthened  by  the  fact  that 
all  rest  upon  the  same  law,  universally  known,  and  are  under  the 
same  recognized  authority,  whose  mode  of  operation  is  universally 
understood.  That  the  convenience  of  their  notes  for  use  is  mate- 
rially increased  by  this  unity  of  regulation,  and  by  the  uniformity 
of  design  of  the  notes  themselves,  is  perhaps  the  one  point  in  the 
working  of  the  national  system  as  to  which  all  are  agreed.  To 
replace  such  a  system  by  any  complex  arrangement  by  which  the 
right  of  issue  should  be  extended  to  state  banks  would  be  a  pal- 
pable sacrifice  of  advantages,  from  which  the  public  as  well  as  the 
stockholders  of  the  banks  are  now  gainers.  It  has  been  proposed 
that  such  state  banks  as  may  accede  to  proper  regulations  pre- 
scribed for  safety  and  solvency  should  be  allowed  the  right  of 
issue.  But  it  is  difficult  to  see  how  such  regulations  could  be 
enforced  with  certainty  except  by  the  authority  of  the  United 
States,  or  by  that  authority  without  much  risk  of  friction  and 
possible  conflict  between  national  and  state  jurisdictions,  or  with- 
out such  strictness  of  rule  and  superintendence  as  would  destroy 
the  reasons  for  preferring  state   organization   to  national.     The 


THE   NATIONAL   BANKING    SYSTEM  229 

last-named  consideration  is  the  more  serious  when  we  consider  the 
fact,  not  to  be  disguised,  that  in  many  states  the  local  opinion  as 
to  what  is  safe  regulation  and  what  is  not  is  too  loose  to  be  satis- 
factory beyond  the  state  line.  In  short,  practical  as  well  as  the- 
oretical difificulties  begin  to  multiply,  as  soon  as  we  attempt  to 
reconcile  the  conception  of  a  really  national  currency  with  anything 
short  of  an  absolutely  uniform  system  of  safeguards. 

The  banking  history  of  the  United  States  has  been  for  the  most 
part  a  succession  of  catastrophic  changes  rather  than  a  process  of 
steady  growth.  One  expedient  after  another  has  been  taken  up, 
abruptly  dismissed  in  its  turn,  like  the  two  Banks  of  the  United 
States,  or  suddenly  revolutionized,  like  the  currency  provisions  of 
the  Independent  Treasury  Act.  The  national  banking  system  has 
now  had  a  longer  term  of  active  existence  than  any  other  national 
system  adopted  in  this  country,  or  any  important  state  system  of 
issue.  Seriously  as  its  defects  have  limited  its  usefulness,  it  has 
grown  in  strength  and  credit.  In  the  course  of  a  generation  it  has 
collected  a  mass  of  legislation,  judicial  precedents,  and  rules  of 
official  practice,  which  make  up  a  body  of  administrative  law  of 
remarkable  completeness  and  value,  known  from  one  end  of  the 
Union  to  the  other,  —  a  common  possession,  in  which  it  is  not 
impossible  that  all  our  people  may  yet  come  to  appreciate  their 
common  interest.  This  is  a  foundation  to  build  upon,  not  an 
experiment  to  be  dismissed  and  superseded  by  some  other.  Never 
since  the  early  part  of  this  century  has  there  been  a  Hke  opportu- 
nity to  improve  our  legislation  upon  banking  and  currency  by  the 
proper  adjustment  of  an  existing  system,  old  enough  and  success- 
ful enough  to  have  acquired  an  historical  position  and  credit.  We 
now  enjoy  an  advantage  analogous  to  that  which  England  finds  in 
making  the  ancient  reputation  and  strength  of  the  Bank  of  Eng- 
land the  starting-point  in  any  financial  measure,  or  France  in  her 
careful  adhesion,  through  every  revolution  in  dynasty  or  politics, 
to  the  century-old  Bank  of  France. 

It  is  also  a  practical  consideration  of  great  weight  that  any 
change  in  the  existing  system  would  be  made  with  the  least 
disturbance  of  business  relations  and  practices  if  it  were  made 
by  the  better  regulation  of  the  mass  of  banks  which  already 
have  the  right  of  issue;  but  upon  this  it  is  not  necessary  to 
dwell. 


230 


ESSAYS 


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THE   NATIONAL   BANKING   SYSTEM 


231 


The  defective  adaptation  of  the  national  banking  system  to  the 
needs  of  the  different  sections  is  amply  shown  by  the  reports  of 
the  Comptroller  of  the  Currency.  From  the  latest  of  these 
reports  1  it  appears  that  in  1896  more  than  two-thirds  in  number 
of  the  national  banks  and  more  than  three-fourths  in  capital  were 
to  be  found  in  the  belt  of  states  lying  north  of  the  Potomac  and 
Ohio  on  the  east  of  the  Mississippi,  and  including  Iowa  and  Min- 
nesota on  the  west  of  this  river.  The  same  states  have  more  than 
one-third  in  number  and  two-fifths  in  capital  of  the  state  banks 
carrying  on  business  without  the  right  of  issue  ;  but  the  state 
banks,  taking  these  states  together,  carry  on  an  unequal  contest 
with  the  national  system.  In  the  rich  states  of  the  North 
the  vast  preponderance,  in  number,  capital,  and  business,  is  with 
the  national  banks,  although,  as  we  advance  westward,  the  newer 
states,  even  in  this  belt,  show  a  more  equal  division  of  the  field. 
Coming  to  the  South  and  Southwest,  excluding  Missouri,  we 
find  the  national  banks  less  numerous  than  the  state  banks,  but 
holding  about  seven-twelfths  of  the  capital  and  a  slightly  larger 
proportion  of  the  deposits.  The  group  made  up  of  Missouri, 
Kansas,  Nebraska,  and  the  Dakotas  shows  a  great  preponderance 
of  state  banks  in  number  and  deposits  and  an  approach  to  equality 
in  capital.^  The  Central  and  Mountain  states  and  territories, 
with  their  extraordinary  differences  of  economic  condition,  have 
placed  the  greater  part  of  their  small  banking  capital  under  the 
national  system  ;  and,  finally,  the  Pacific  states  show  a  great  pre- 
ponderance of  state  banking,  which  upon  examination  is  found  to 
be  due  to  the  little  use  made  of  national  banks  by  California. 

It  is  clear  that  the  inequalities  thus  briefly  recapitulated  rest 
upon  something  more  than  mere  differences  in  population,  wealth, 

1  See  table  on  page  230. 

In  this  table  the  Middle  states  include  Maryland  and  the  District  of  Columbia;  the 
West  and  Northwest,  the  states  from  Ohio  to  Iowa  and  Minnesota;  the  South  and 
Southwest,  the  Atlantic  and  the  Gulf  states  from  Virginia  to  Texas,  with  West  Virginia, 
Arkansas,  Kentucky,  and  Tennessee  ;  the  Missouri  River  group  is  Missouri,  Kansas, 
Nebraska,  and  the  Dakotas  ;  the  Pacific  states  are  Nevada,  California,  Oregon,  and 
Washington  ;  the  Central  and  Mountain  group  is  Colorado,  Idaho,  Montana,  Wyoming, 
Utah,  New  Mexico,  Arizona,  Oklahoma,  and  the  Indian  Territory. 

2  It  should  be  noted  here  that  in  the  Comptroller's  returns  for  Kentucky,  Kansas, 
Nebraska,  and  Oklahoma,  the  figures  for  state  banks  include  private  as  well  as  incorpo- 
rated banks.  Of  the  Kansas  banks  returned  109  were  private,  and  of  those  in  Ne- 
braska 81,  mostly  of  small  capital  in  each  case. 


232  ESSAYS 

and  general  activity.  Those  differences  would  lead  us  to  expect 
much  disproportion  in  the  use  of  banks  in  general ;  but  it  is  plain 
that,  in  addition  to  this,  the  comparative  attractions  of  national 
banking  with  the  right  of  issue,  and  of  state  banking  without  it,  are 
differently  estimated  in  different  states  and  sections.  This  appears 
still  more  clearly  when  a  comparison  is  made  between  different 
parts  of  the  same  section.  Thus,  in  the  large  Western  group,  the 
four  newer  states  —  Michigan,  Wisconsin,  Iowa,  and  Minnesota  — 
have  $36,000,000  of  state  bank  capital  to  $52,000,000  of  national, 
in  this  respect  approximating  the  condition  of  sparsely  settled  agri- 
cultural states  in  other  sections.  In  the  South,  of  the  most  impor- 
tant banking  states,  the  Virginias  and  Kentucky  have  $32,000,000 
of  state  bank  capital  to  $21,000,000  of  national.  In  general,  the 
rule  holds  that  the  older,  richer,  or  more  densely  populated  states, 
with  varied  industries,  find  it  easier  to  use  the  national  system  than 
the  more  thinly  settled  communities,  poor  in  capital  and  carrying 
on  industries  of  slow  return.  Even  such  an  apparent  exception  as 
that  of  Texas,  where  only  the  national  system  appears  to  be  used, 
proves  the  rule;  for  Texas,  since  1876,  has  forbidden  by  her  consti- 
tution the  establishment  of  state  banks,  and  any  competition  with 
national  banks  must  there  be  carried  on  by  private  bankers. 

It  is  beyond  dispute  that  one  of  the  most  serious  difficulties  in 
the  use  of  the  national  system  in  the  newer  or  poorer  communi- 
ties is  the  requirement  of  an  investment  in  United  States  bonds, 
locking  up  banking  capital  in  a  non-banking  security,  returning 
less  than  three  per  cent  to  the  holder.  In  the  older  states,  with 
abundance  of  capital  and  low  rates  of  profit,  this  requirement  has 
less  importance ;  but  in  states  where  the  conditions  are  reversed 
it  is  a  heavy  block  in  the  way  of  the  national  system  and  its  possi- 
ble usefulness.  Especially  does  the  bond  deposit  block  the  way 
in  any  section  where  there  is  a  need  of  banks  of  relatively  small 
capital ;  for,  as  the  minimum  holding  of  bonds  is  one-fourth  of 
the  capital  for  banks  of  $150,000  or  under,  and  $50,000  for  larger 
banks  of  whatever  size,  it  bears  most  heavily  in  proportion  upon 
the  small  capitals.  The  comparative  pressure  of  this  requirement 
in  different  sections,  in  October,  1896,  is  shown  by  the  Comptroller 
of  the  Currency,^  in  a  table  from  which  the  following  statement 
is  made  up  :  — 

1  Report  for  1896,  p.  552. 


THE   NATIONAL   BANKING   SYSTEM 


233 


New  England  .  . 
Middle  States  .  . 
West  and  Northwest 
South  and  Southwest 
Missouri  River  .  . 
Central  and  Mountain 
Pacific       .... 


Bonds  held 
FOR  Circulation 

65.4 
87.9 

Minimum 
Required 

21.6 

28.9 

Percentage 
OF  Excess 

.67 

.67 

45-6 

24.9 

•45 

21.3 

14.2 

•33 

9.2 

7-1 

•23 

3-9 

2.9 

.29 

3-9 

3- 

.24 

237.2 


102.6 


The  reluctance  with  which  the  investment  in  bonds  is  made  by- 
small  banks  in  the  agricultural  states  is  also  shown  with  great 
distinctness  by  the  case  of  Texas,  where  vigorous  growth  calls 
for  extended  banking,  but  only  national  banks  can  obtain  charters. 
Of  the  207  national  banks  in  Texas,  88  are  banks  of  $50,000 
capital,  of  which  86  have  the  exact  minimum  of  bonds,  i  a  nomi- 
nal excess,  and  i  a  circulation  equal  to  its  capital.  Of  the  y6 
banks  above  $50,000  and  not  over  $100,000,  63  have  only  the 
exact  minimum,  7  only  a  nominal  excess,  and  6  have  together 
$182,250  above  the  minimum.  Of  the  43  banks  having  capitals 
above  $100,000,  36  have  the  exact  minimum  of  bonds,  3  have  only 
a  nominal  excess,  and  4  have  together  $208,000  in  excess  of  the 
requirement.  For  the  whole  $20,920,000  of  national  bank  capital 
in  Texas,  the  bonds  held  for  circulation  above  the  legally  possible 
minimum  is  but  $434,700.  The  inference  from  these  figures  is 
irresistible  that  banks  in  Texas  cannot  afford  to  invest  at  the  low 
rate  of  interest  yielded  by  United  States  bonds,  and  the  presump- 
tion is  strong  that  the  increase  of  small  banks  is  hindered  and 
that  capital  is  forced  into  other  channels  by  the  bond  requirement. 
Nebraska  is  also  a  strong  case  of  the  same  kind,  with  the  differ- 
ence that  Nebraska  seeks  her  relief  by  means  of  incorporated  state 
banks.  The  113  national  banks  in  Nebraska,  having  an  aggre- 
gate capital  of  $10,975,000,  hold  only  $368,650  of  bonds  in  excess 
of  the  required  amount;  and  $333,000  of  this  excess  is  held  by 
the  large  banks  in  the  cities  of  Lincoln  and  Omaha.  Out  of  72 
banks  of  $50,000  capital,  only  3  hold  bonds  exceeding  the  mini- 
mum, by  so  much  as  $1000,  and  64  hold  no  excess  whatever. 
Similar  illustrations  of  the  working  of  the  bond  requirement  may 
be  found  in  many  other  states. 

Of   the    objects  to  be   gained   from  the  deposit  of   bonds, — 


234  ESSAYS 

security  for  the  notes  and  the  creation  of  a  market  for  bonds,  — 
the  former  alone  now  has  any  value.  Against  the  complete  at- 
tainment of  this  object,  which  must  be  admitted,  have  to  be  set 
the  facts  that,  as  the  government  credit  rises,  the  inducement  to 
take  out  circulation  weakens,  so  that  the  strength  of  the  security 
tends  to  pinch  the  issue  out  of  existence,  and  that  the  necessity  of 
giving  this  particular  kind  of  security  produces  the  maximum  of 
discouragement  in  sections  where  the  need  of  banking  facilities 
is  strongly  felt.  The  propositions  to  permit  notes  to  be  issued  to 
the  par  of  the  bonds,  instead  of  the  ninety  per  cent  so  far  allowed, 
and  to  moderate  or  withdraw  the  one  per  cent  tax  on  circulation,  are 
offered  as  palliatives  for  an  acknowledged  evil ;  but  they  do  not 
strike  at  the  cause,  nor,  as  will  be  seen,  can  they  have  any  effect 
upon  some  of  the  more  serious  difficulties  of  the  system.  The 
root  of  the  trouble  is,  after  all,  the  necessity  for  taking  a  relatively 
large  part  of  the  capital  of  a  bank  out  of  the  proper  business  of 
banking,  and  investing  it  elsewhere,  when  all  that  the  bank  can 
do  by  means  of  its  capital  and  credit  combined  is  needed  for 
the  accommodation  of  its  customers.  A  complete  remedy  would 
have  to  start  therefore,  as  was  proposed  by  the  American  Bank- 
ers' Association  in  1894^  in  the  well-known  "Baltimore  Plan," 
with  the  abolition  of  the  bond  deposit  and  the  restoration  of  the 
note  to  its  natural  relation,  as  an  exercise  of  credit  in  the  business 
of  banking.  If  to  this  were  added  provisions  for  the  security  of 
the  note-holder  by  a  first  lien  on  the  assets  of  the  bank,  and,  as 
was  also  proposed  in  the  Baltimore  Plan,  by  a  guarantee  or  safety 
fund  supported  by  the  contributions  of  the  issuing  banks,  both 
reason  and  experience  show  that  the  strength  of  the  note  would 
be  ample.  Some  other  parts  of  the  present  system  would  no 
doubt  need  revision.  Provision  for  more  thorough  inspection 
than  is  possible  with  the  present  staff,  more  frequent  publication 
of  accounts,  and  strengthening  of  the  stockholder's  liabiHty,  not 
in  its  nominal  extent,  but  in  its  binding  effect,^  are  changes  already 
needed,  which  would  then  be  seen  to  be  imperative. 

1  For  the  details  of  the  "  Baltimore  Plan  "  see  White's  "  Money  and  Banking,"  p.  458; 
Journal  of  Political  Economy,  December,  1894,  p.  loi. 

'■'  Prior  to  1880  only  about  thirty-five  per  cent  of  assessments  upon  stockholders  of 
insolvent  banks  was  actually  collected  ;  and  in  the  finished  cases  since  1880,  reported 
in  the  Comptroller's  Report  for  1896  (Table  No.  76),  it  appears  that  the  collections 
averaged  only  fifty-two  per  cent. 


THE   NATIONAL   BANKING   SYSTEM  235 

Amended  by  resting  the  issues  of  national  banks  upon  their 
assets,  where  the  business  community  are  wilUng  to  let  the 
$1,600,000,000  of  deposits  rest,  the  system  would  be  freed  from 
one  of  the  burdens  which  hinder  its  progress  in  the  South  and 
West.  It  would  still  find  its  growth  seriously  hampered  in 
sparsely  settled  districts  everywhere,  by  the  inability  of  a  small 
community  either  to  provide  the  capital  or  to  supply  the  business 
for  banks  of  the  size  required  by  the  present  law.  On  this  sub- 
ject a  flood  of  light  is  thrown  by  Mr.  Thornton  Cooke,  in  a 
paper  1  showing  the  distribution  of  small  banks  in  Missouri, 
Kansas,  Nebraska,  and  the  Dakotas.  In  these  states  the  mini- 
mum capital  required  for  state  banks  is  $10,000  in  Missouri 
and  1^5000  in  the  four  other  states.  Whatever  this  minuteness 
of  capital  may  show  as  to  the  prudence  of  the  legislation,  it 
proves  that  in  this  important  block  of  states  the  need  of  diffu- 
sion is  keenly  felt ;  and  the  same  inference  is  to  be  drawn  from 
the  minimum  of  $15,000  required  in  Michigan  and  $10,000  in 
Minnesota.  In  the  five  states  dealt  with  by  Mr.  Cooke  an  ex- 
traordinary development  has  taken  place.  Of  1247  state  banks 
covered  by  the  latest  official  returns,  and  excluding  private  banks, 
1 1 58  are  not  beyond  the  $50,000  line  of  capital,  451  are  not 
beyond  the  line  of  $10,000,  and  112  have  capitals  not  exceeding 
$5000.  The  tables  make  it  plain  that  in  these  states,  as  a  whole, 
there  has  been  a  strong  movement  to  provide  for  needs  not  now 
covered  by  the  national  system.  There  is  a  long  list  of  other 
states  in  which,  upon  examination,  we  should  find  proof  of  de- 
mands not  satisfied  by  the  national  system,  but  met  imperfectly 
by  state  banks  and  by  the  great  number  of  private  banks,  of  whose 
operations  there  is  no  record  even  approximately  complete.  In 
every  other  important  banking  country  such  a  demonstrated 
need  as  this  for  diffused  but  sound  banking  would  be  answered 
by  the  establishment  of  branches  or  agencies  of  banks  of  larger 
capital.  This  method  is  not  unknown  in  the  United  States,  al- 
though for  various  reasons  its  application  for  many  years  past 
has  been  confined  to  a  few  states  and  has  been  on  a  limited  scale. 
That  it  is  less  applicable  or  hopeful  here  than  in  all  the  other 
English-speaking  countries,  or  that  it  needs  anything  more  than 
proper  encouragement  for  its  wide  introduction,  at  least  in  sections 

1  See  Appendix,  Quarterly  Journal  of  Economics,  October,  1 897. 


236  ESSAYS 

like  the  South  and  West,  it  is  hard  to  believe.  The  change  re- 
quired in  the  present  law  would  be  slight.  If  no  use  were  made 
of  the  liberty  to  establish  branches,  the  national  system  would 
simply  stand  as  at  present,  if  not  improved,  at  least  not  impaired ; 
and,  if  use  were  made  of  the  liberty,  one  of  the  two  barriers  which 
bar  the  access  of  national  banks  to  an  important  field  would  have 
ceased  to  block  the  way.^ 

It  has  also  been  proposed,  as  a  partial  remedy  for  the  imperfect 
distribution  of  banking  under  the  national  system,  to  reduce  the 
minimum  required  capital  to  $25,000,  as  it  stands  in  the  law  of 
New  York  and  of  several  other  states.^  This  proposition,  how- 
ever, is  open  to  some  serious  objections.  It  plainly  does  not  go 
far  enough  to  reach  the  seat  of  a  great  part  of  the  evil.  Taking 
for  illustration  the  case  of  the  Missouri  and  Dakota  group  already 
referred  to,  it  appears  from  Mr.  Cooke's  tables  that  little  over  one- 
third  of  the  state  banks  in  that  group  have  capitals  above  $20,000. 
The  fact  appears  to  be  that  banks  of  $25,000  capital  would  be 
almost  as  completely  beyond  the  means  of  a  majority  of  the  small 
village  centres  in  sparsely  settled  districts  as  banks  of  $50,000  are 
now.  But,  even  if  such  a  reduction  of  required  capital  were 
enough  to  lead  to  an  important  extension  of  the  national  system,  it 
is  also  a  serious  question  whether  on  other  grounds  this  would  not 
be  a  move  in  the  wrong  direction.  As  national  banks  multiply  in 
number,  the  problem  of  insuring  sound  management  by  effective 
supervision  becomes  grave.  With  not  far  from  thirty-seven  hun- 
dred banks  already  in  operation,  the  United  States  evidently  have 
in  hand  a  task  such  as  no  government  ever  before  undertook  ;  and 
the  difficulties  of  this  task  would  increase  with  the  further  pulveri- 
zation of  capital  now  suggested.  The  records  of  failures  show  that 
even  in  large  banks  the  close  attention  of  directors  is  not  always 
easily  had  ;  but  with  banks  of  the  smallest  class  in  small  villages, 
not  only  is  there  increased  difficulty  in  making  it  worth  the  while 
of  directors  to  give  the  requisite  attention  and  thought  to  what  is, 
after  all,  a  matter  of  but  trifling  importance  to  any  one  individual, 
but  there  is  also  the  often  experienced  embarrassment  in  finding 

1  The  present  Comptroller  of  Currency  has  urged  the  introduction  of  the  branch 
system  in  his  Report  for  1896,  p.  102  ;  and  the  same  ground  was  taken  by  Secretary 
Carlisle,  Finance  Report,  1895,  P*  ''"'''iv. 

2  For  this  also  see  Report  of  the  Comptroller  of  the  Currency,  1896,  p.  102. 


THE   NATIONAL    BANKING    SYSTEM  237 

among  the  business  men  of  a  village  the  material  for  making  up 
a  competent  board.  The  best  promise  of  good  management  is 
afforded  by  a  bank  with  an  immediate  constituency  large  enough 
to  supply  an  ample  choice  of  men,  and  with  a  capital  large  enough 
to  secure  the  pressure  of  a  full  sense  of  responsibility,  and  to 
demand  a  reasonable  share  of  time  and  care  from  an  unpaid  body 
of  men.  In  short,  any  change  in  capital  should  be  in  the  direction 
of  consolidation  rather  than  subdivision.  The  smallest  class  of 
national  banks  now  in  existence  should  shrink,  and  the  extension 
of  the  system  should  be  effected  by  banks  of  more  considerable 
capital,  if  we  are  to  move  towards  the  most  efficient  and  safe 
organization.  As  for  the  suggestion  that  such  a  movement  would 
mean  diminished  competition  and  the  "  concentration  of  the 
money  power,"  a  system  of  thirty-seven  hundred  members  would 
afford  ample  scope  for  healthy  consolidation  long  before  the 
danger  point  could  come  into  view.  As  for  any  risk  of  monopoly, 
if  the  power  of  establishing  branches  were  restricted  within  state 
lines,  every  state  would  be  likely  to  find  within  its  borders  suffi- 
cient competition  among  its  own  banks  to  give  its  people  the  full 
benefit  of  diffused  accommodation,  free  from  external  control  or 
internal  combination. 

So  far  our  discussion  has  turned  chiefly  upon  the  present 
inability  of  the  national  banking  system  to  develop  banking  in  ac- 
cordance with  pressing  needs  of  important  sections  of  the  country. 
The  further  objection  that  the  system  is  not  so  constituted  as  to 
supply  an  elastic  currency  points  to  a  defect  in  the  working  of  the 
bank  circulation  in  every  section.  This  objection  is  indisputable,  if 
we  give  to  the  word  "  elasticity  "  the  meaning  usually  given  to  it  in 
banking  discussions.  If  by  elasticity  we  are  to  understand  nothing 
more  than  mere  capacity  for  growth  under  favoring  conditions,  or 
variability,  no  doubt  the  bank  circulation  has  varied  and  has  had 
its  periods  of  growth.  It  rose  rapidly  in  its  earlier  period,  when 
the  investment  in  bonds  yielded  a  high  return ;  it  ran  down  for  a 
long  series  of  years  as  the  return  upon  bonds  declined ;  and  it 
rose  again  after  the  revulsion  of  1893,  when  with  the  decline  of 
bonds  the  return  upon  them  advanced.  But  the  elasticity  of  a 
currency  is  understood  to  mean  something  quite  different  from 
this  tendency  to  vary  over  long  periods.  It  means  responsiveness 
to  present  increase   or   diminution   of   demand,  —  the   power   of 


238  ESSAYS 

adaptation  to  the  needs  of  the  month,  the  week,  or  the  day, 
whether  rising  or  faUing.  A  glance  at  the  figures  for  any  series 
of  years,  or  for  any  period  of  marked  change  in  affairs,  shows  that 
the  national  bank  circulation  has  never  had  this  quality.  How 
should  it  be  elastic  ?  Elasticity  implies  the  operation  of  counter 
forces,  in  a  currency  as  well  as  in  a  steel  spring.  That  a  currency 
may  be  responsive  to  demand,  it  is  necessary  that  the  forces,  tend- 
ing respectively  to  expand  or  to  restrict,  should  be  forces  at  work 
in  the  daily  business  of  the  bank,  where  it  is  brought  into  contact 
with  the  community  by  the  stream  of  loans,  deposits,  and  pay- 
ments. But  under  the  national  system  at  present  the  motives  for 
extending  issues  are  completely  separated  from  real  banking  con- 
siderations, and  such  tendencies  for  the  return  of  notes  as  exist 
are  equally  foreign  to  the  relations  between  the  issuing  bank  and 
that  portion  of  the  public  which  it  serves. 

The  failure  of  the  national  system  to  provide  for  a  return  flow  of 
notes  by  some  effective  plan  of  redemption  is  no  doubt  due  to  the 
circumstances  under  which  the  national  bank  acts  were  passed. 
Looking  to  a  distant  future,  the  acts  contemplated  an  ultimate 
return  to  specie  payment,  and  some  of  their  provisions  were 
shaped  accordingly.  But,  after  all,  Congress  was  not  greatly 
interested  in  any  present  requirement  of  redemption,  when,  so 
far  as  could  be  seen,  the  redemption  of  a  note  must  for  years  mean 
no  more  than  its  exchange  for  another  piece  of  paper,  itself  irre- 
deemable. To  tie  the  bank  circulation  to  the  public  debt,  and 
thus  to  secure  for  it  as  good  a  chance  of  ultimate  solvency  as  a 
promise  by  the  government  could  then  have,  and  to  give  the  bank 
paper  universal  credit,  were  immediately  attainable  results,  beyond 
which  there  was  not  felt  to  be  much  necessity  for  looking.  The 
act  of  1863  accordingly  made  no  provision  for  the  ordinary  re- 
demption of  bank-notes  anywhere  except  at  the  counter  of  the 
bank  itself;  and  the  chance  of  presentation  there  was  obviously 
so  slight,  that  Mr.  Sherman  cheerfully  assured  the  Senate  that 
"  these  notes,  all  being  the  same,"  so  far  from  having  a  pitiful  life 
of  thirty  or  sixty  days,  "may  have  an  indefinite  circulation,  and 
the  average  may  extend  to  years."  ^  It  was  clearly  the  expectation 
that  the  notes,  when  once  set  afloat,  would  drift  on  the  ocean  of 

1  Cong.  Globe,  February  10,  1863,  p.  843.  Mr.  Baker  of  New  York,  in  the  House, 
insisted  upon  the  need  of  central  redemption.     Ibid.,  February  20,  p.  1141. 


THE    NATIONAL    BANKING    SYSTEM 


239 


paper  as  long  as  their  material  could  hold  together.  The  amended 
act  of  1864  added  the  requirement  that  every  bank  outside  of  the 
redemption  cities  should  redeem  its  notes  through  some  bank  in 
one  of  those  cities,  and  that  all  banks  in  other  redemption  cities 
should  redeem  their  notes  through  banks  in  the  city  of  New  York ; 
but,  in  the  absence  of  any  motive  for  demanding  the  redemption 
of  notes  which  every  holder,  whether  a  bank  or  an  individual, 
could  use  in  his  own  payments,  these  provisions  served  only  as  a 
reason  for  allowing  banks  to  reckon  as  a  part  of  their  reserve  the 
funds  deposited  by  them  with  banks  acting  as  their  redeeming 
agents. 

This  inadequate  arrangement  did  not  satisfy  the  conservative 
banking  opinion  of  the  country;  and  in  1865  and  1866  an  impor- 
tant movement  for  establishing  assorting  houses  in  the  chief  finan- 
cial centres,  with  central  redemption,  was  organized  in  New  York, 
Boston,  and  Philadelphia,  with  the  approval  of  the  Secretary  of 
the  Treasury  and  the  Comptroller  of  the  Currency.^  The  ele- 
ments of  opposition,  however,  were  too  strong.  The  project  lost 
its  strength,  and  died ;  and  the  opportunity  was  lost.  The 
national  bank  system  grew  up  with  an  apparatus  of  redemption 
which  did  everything  but  redeem ;  and  no  change  was  made  until 
1874,  when  the  function  of  redemption  was  transferred  to  the 
Treasury,  and  banks  were  even  forbidden  by  law  to  redeem  any- 
where else,  except  at  their  own  counters.  Thus  we  have  to-day 
a  system  of  so-called  redemption,  which  no  doubt  removes  from 
circulation  notes  which  for  sanitary  reasons,  or  from  wear  and 
tear,  are  unfit  for  further  use,  and  enables  banks  which  are  over- 
loaded with  bank-notes  at  any  season  to  convert  them  into  green- 
backs ;  but,  plainly,  the  redemption  thus  carried  on  has  little 
more  than  an  accidental  connection  with  the  financial  condition 
of  any  issuing  bank.  A  large  amount  of  notes  may  be  passing 
through  the  Redemption  Bureau ;  but  the  National  Bank  of  X 
has  no  reason  to  look  for  any  unusual  return  of  its  notes,  however 
extreme  its  expansion  may  be,  for  the  holder  of  its  notes,  what- 
ever the  amount  of  its  obligations,  will  sooner  use  them  in  pay- 

^  For  the  action  of  the  banks  engaged  in  this  movement,  and  for  Secretary  McCul- 
loch's  part  in  it,  see  Banker^s  Magazine,  1865-1866,  pp.  193,  401,  415.  For  the  views  of 
the  Comptroller  of  the  Currency,  Report,  1865  (for  Mr.  Clarke's)  and  (for  Mr.  Hurl- 
burd's)  1866  to  1870. 


240  ESSAYS 

ments  than  waste  time  by  sending  them  to  the  Treasury.  This 
is  not  a  kind  of  redemption  which  can  possibly  make  the  bank 
circulation  responsive  to  the  demands  of  business,  whatever  else 
it  may  accomplish. 

The  singular  futility  of  all  this  part  of  our  legislation  is  no 
doubt  closely  connected  with  the  ideas  as  to  the  meaning  of  note 
redemption  in  general,  which  have  grown  up  in  connection  with 
the  greenbacks.  Even  before  the  act  of  1878  ordered  the  reissue 
of  the  redeemed  greenbacks,  the  original  idea  of  redemption  as 
the  fulfilment  and  ending  of  a  contract  had  been  obscured.  That, 
as  a  matter  of  legal  interpretation,  a  note  "  retired  and  cancelled  " 
had  been  paid,  and  that  any  new  issue  must  be  a  new  debt,  re- 
quiring clear  legal  authority  for  incurring  it,  had  been  disputed 
for  more  than  ten  years,^  until  something  more  than  the  mere 
interpretation  of  a  statute  had  come  into  the  question.  From  1866 
to  1878  there  is  shown  in  the  debates  and  the  acts  of  Congress  a 
progressive  weakening  of  the  force  assigned  to  the  term  "  redemp- 
tion," and  the  growth  of  an  opinion  that  everything  needful  is 
accomplished,  if  the  opportunity  for  an  exchange  of  one  kind  of 
currency  for  another  is  somewhere  held  open. 

But  is  it  enough  that  every  holder  of  government  or  bank 
notes  should  understand  that  gold  can  always  be  had  for  the 
paper  at  the  Treasury  or  the  bank  ?  Especially  as  regards  bank- 
notes, can  redemption  do  its  work  if  it  is  merely  a  passive  arrange- 
ment for  possible  payment,  in  case  anybody  thinks  it  worth  while 
to  call  for  it,  and  not  an  active  system  of  prompt  presentation .-' 
At  the  bottom  of  much  that  is  said  and  written  on  this  subject 
there  would  seem  to  be  an  impression  that  to  give  the  public 
convincing  assurance  of  convertibility  is  the  only  object  to  be 
provided  for.  But  the  redemption  of  a  currency  has  a  bearing 
much  broader  than  this.  The  exchange  of  notes  for  specie  on 
any  large  scale  is  called  for  in  most  cases  because  the  trade  rela- 
tions of  the  country  or  the  section  concerned  are  such  as  to  make 
specie  for  the  time  its  cheapest  export.     This  state  of  things  may 

^  In  January,  1868,  Mr.  Edmunds  stated  in  the  Senate  his  opinion  that  the  notes 
"retired  and  cancelled"  under  the  act  of  1866  could  be  reissued,  and  moved  an  amend- 
ment to  a  pending  bill  to  prevent  this.  Mr.  Sherman  ol)jected  that  reissue  was  illegal 
and  further  legislation  on  the  point  needless,  and  Mr.  Edmund's  amendment  was  lost. 
Cong.  Globe,  January  10,  1868,  pp.  435,  529.  Six  years  later  $26,000,000  of  notes  once 
"  retired  and  cancelled  "  were  reissued. 


THE   NATIONAL   BANKING   SYSTEM  24I 

be  the  result  of  deplorable  misfortune  or  of  equally  deplorable 
folly ;  but  in  either  case  it  is  the  misfortune  or  the  folly  that  is 
to  be  deplored,  and  not  the  process  by  which  we  pay  in  the  easiest 
way  the  debts  which  have  been  created.  The  payment  is,  after 
all,  a  curative  process,  by  which  our  currency  seeks  the  condition 
of  equilibrium  with  our  real  ability  to  hold  money,  as  the  first  step 
towards  sound  strength  ;  and  it  is  for  the  general  interest  that  the 
movement  of  specie  should  be  easy,  and  that  the  payment  of  our 
debts,  in  this  form  as  well  as  any  other,  should  be  prompt. 

Moreover,  whether  we  look  at  the  government  issue  or  at  that 
of  the  banks,  it  is  important  that  the  natural  effect  of  a  depletion 
of  our  currency  by  specie  export  should  not,  under  ordinary  cir- 
cumstances, be  thwarted  or  warded  off.  In  the  one  case,  for  the 
government  to  undertake,  by  the  reissue  of  its  notes,  to  keep  up 
the  domestic  currency  in  the  face  of  a  movement  for  redemption 
and  specie  export,  is  to  make  that  currency,  so  far  as  may  be 
possible,  insensitive  to  the  influences  which  tend  to  its  final  re- 
plenishment. Mr.  Sherman  perhaps  had  a  vision  of  this  truth 
when  he  recommended  "that  by  law  the  resumption  fund  be 
specifically  defined  and  set  apart  for  the  redemption  of  United 
States  notes,  and  that  the  notes  redeemed  shall  only  be  issued  in 
exchange  for  or  purchase  of  coin  or  bullion."  ^  No  doubt  such  an 
arrangement,  so  long  as  Congress  permitted  its  existence,  would 
at  any  rate  have  insured  the  close  reciprocal  relation  which  any 
effective  redemption  of  greenbacks  should  have  with  the  active 
currency,  and  would  have  made  the  position  of  the  Treasury 
defensible  without  the  alternation  of  panic  and  loan  which  has 
been  witnessed  since  1893.  In  the  other  case,  it  is  almost  equally 
important  that,  so  far  as  an  export  movement  of  specie  draws  from 
the  bank-note  circulation,  it  should  draw  as  directly  as  possible 
from  the  particular  banks  which  are  in  a  state  of  relative  expan- 
sion. The  drain  of  specie  is  presumably  not  the  consequence  of 
any  equally  distributed  imprudence  or  any  level  stroke  of  misfor- 
tune ;  and  its  effect  should  fall,  both  by  the  rule  of  right  and  by 
that  of  expediency,  upon  some  more  heavily  than  upon  others. 
This  can  only  be  secured  by  providing  for  an  easy,  automatic 
return  of  notes,  so  that  expanded  liability  shall,  so  far  as  is 
humanly  possible,  be  followed  by  increased  demand  for  payment. 

1  Finance  Report,  1879,  p.  x. 


242  ESSAYS 

With  the  imperfect  conception  of  redemption  in  general  on 
which  our  law  proceeds,  it  is  not  surprising  that  the  national-bank 
note,  when  once  issued,  should  be  regarded  as  a  liability  of  indefi- 
nite date,  differing  from  other  bank  liabilities  in  this,  that  the 
issuing  bank  hardly  need  trouble  itself  as  to  its  discharge.  The 
fact  that  it  has  thus  become  something  not  far  different  from  a 
permanent  obligation,  is  no  doubt  one  of  the  grounds  for  the  idea 
of  unjust  privilege  which  so  many  of  our  people  connect  with  the 
national  bank  system.  It  is  also  singularly  at  variance  with  the 
principle  of  having  a  wholesome  restraint  upon  the  operations  of 
each  bank  by  itself,  which  governs  our  treatment  of  other  demand 
liabilities.  Provision  for  the  systematic  return  of  notes  by  other 
banks,  like  the  daily  collection  of  checks,  is  so  contrary  to  our 
present  established  habits  of  thought  that  it  seems  abnormal,  in- 
consistent with  full  credit,  and  useless,  if  not  hostile.  But,  not  to 
dwell  upon  other  considerations,  it  appears  too  plain  to  require 
demonstration  that  a  regular  return  flow  of  notes  is  the  necessary 
condition  of  the  elasticity  which  is  now  commonly  demanded  for 
our  bank  currency.  Elasticity  cannot  be  secured  without  the 
operation  of  restrictive  force  upon  an  outstanding  circulation :  re- 
strictive force  cannot  operate  there,  except  through  the  agency  of 
the  holders  of  the  notes ;  and  it  can  only  operate  through  them  by 
virtue  of  some  legal  provision  or  of  some  convention  or  practice 
having  equivalent  force.  Of  legal  provisions  for  this  end  a  striking 
example  is  supplied  by  the  law  of  Massachusetts,  which  from  1843 
forbade  any  bank  to  pay  out  any  notes  except  its  own,  and  thus 
made  it  necessary  that  notes  received  on  deposit  or  in  payments 
should  be  sent  to  the  issuing  banks  for  redemption.  Of  a  practice 
equivalent  in  effect  to  this,  there  is  the  equally  striking  case  of  the 
Canadian  banks,  which,  without  any  requirement  of  law,  but  simply 
as  competitors  for  business,  "  demand  prompt  and  daily  redemption 
of  all  the  notes  of  other  banks  that  have  come  in."  ^  But  our  sys- 
tem presents  nothing  analogous  to  these  devices  for  making  the 
self-interest  of  the  banks  the  restrictive  force  needed  to  secure 
elasticity  of  issue.^     We  appear  to  rely  vaguely  upon  some  sup- 

1  Breckinridge  states  that  the  average  life  of  a  bank-note  in  Canada  is  found  to  be 
about  four  weeks.     "Canadian  Banking  System,"  p.  407. 

2  Breckinridge  gives  {ihid.,  p.  408)  a  diagram  showing  the  monthly  variation  of 
the  issues  of  the  Canadian  banks  for  fifteen  years.     The  minimum  is  usually  reached  in 


THE   NATIONAL   BANKING   SYSTEM  243 

posed  slowly  acting  tendency  of  the  public  to  free  itself  by  some 
means  of  a  currency,  if  felt  to  be  excessive ;  but  we  set  no  machin- 
ery in  motion  for  that  purpose,  and  do  not  make  it  for  the  interest 
of  anybody  in  particular  to  do  that  which  on  general  grounds  may 
be  desirable  for  all.  Even  so  radical  a  scheme  of  reform  as  the 
"  Baltimore  Plan  "  contents  itself  with  the  existing  provisions  for 
redemption. 

It  is  obvious  that  the  practical  difficulties  of  redemption  have 
multiplied  with  the  growth  of  our  system.  Methods  easily  estab- 
lished at  the  start  would  be  difficult  of  introduction  into  a  mass  of 
nearly  thirty-seven  hundred  national  banks.  Still,  unless  we  are 
prepared  to  surrender  the  idea  of  true  elasticity,  the  means  must 
finally  be  devised  for  making  the  bank-note  as  well  as  the  check 
present  itself  systematically  and  promptly  for  payment ;  and  it  is 
highly  improbable  that  this  can  be  done  without  restricting  the 
right  of  national  banks  to  pay  out  other  notes  than  their  own.  It 
is  conceivable,  although  unlikely,  that  competition  might  set  in 
among  the  banks  of  a  single  state,  and  prompt  them  to  refuse  of 
their  own  accord  to  circulate  each  other's  notes,  although  a  result 
like  this  —  easy  to  understand  in  a  system  of  only  thirty-nine  banks, 
like  the  Canadian  —  would  be  hard  to  reach  in  states  which  count 
their  national  banks  by  hundreds.  But  outside  of  its  own  state, 
and  probably  within  it,  the  circulation  of  a  bank-note  would  have 
to  end  by  law  with  its  receipt  in  payment  or  on  deposit  by  a  na- 
tional bank,  and  its  return  for  redemption  would  have  to  follow. 

Probably  the  mere  administrative  difficulties  in  the  way  of  an 
effective  system  of  real  general  redemption  would  not  be  found  to 
be  so  serious  as  they  might  appear  at  first  blush.  For  the  most 
part  the  reserve  cities,  formerly  known  as  redemption  cities,  would 
be  the  natural  centres  of  redemption,  at  which  the  banks  would 
clear  their  notes  with  each  other  as  they  now  clear  their  checks  in 
a  clearing-house ;   and  the  two  operations  would  be  likely  to  be 

June,  but  sometimes  in  August,  and  one  year  in  September;  and  the  maximum  is  always 
near  the  beginning  of  November.  From  the  lowest  point  to  the  highest,  the  average 
annual  rise,  which  disappears  in  January,  is  about  twenty  per  cent.,  varying  in  the  last 
dozen  years  from  under  thirteen  per  cent  in  1882  to  twenty  four  per  cent,  in  1888. 
There  is  also  a  small  rise  in  the  spring,  nearly  always  at  the  beginning  of  April,  but 
occasionally  a  month  earlier,  trifling  in  amount,  but  singularly  constant,  and  showing  a 
remarkably  close  correspondence  between  the  notes  in  circulation  and  some  regularly 
recurring  condition  of  business. 


244  ESSAYS 

carried  on  under  the  same  roof.  The  reserve  cities  would  neces- 
sarily exchange  with  each  other,  possibly  at  a  common  centre ;  and 
thus,  the  country  being  districted,  presumably  with  reference  to  the 
natural  course  of  commercial  payments,  notes  paid  in  or  deposited 
at  any  point  would  find  their  way  back  to  the  issuing  bank,  through 
the  same  channels  in  which  the  streams  of  other  liabilities  flow  back 
upon  the  debtor  banks,  and  without  more  difficulty.  No  change  in 
the  present  uniformity  of  design  of  the  national-bank  notes  would 
be  required.  Distinctive  marks  to  determine  the  redemption  dis- 
trict in  which  a  note  belongs,  and  possibly  its  state  also,  could  be 
as  easily  stamped  upon  it  as  the  charter  number  of  the  bank  is  now, 
and  would  be  all  that  is  required  for  instant  recognition.  More- 
over, the  labor  of  assorting  the  notes,  with  a  redemption  system 
once  fairly  in  operation,  is  not  to  be  inferred  from  the  present  con- 
dition of  the  bank  circulation.  We  now  see  a  confused  mass  of 
notes  on  which  no  regularly  acting  agency  of  this  sort  has  been  at 
work;  but,  with  an  established  compulsory  return  of  notes,  the 
bank  circulation  of  every  part  of  the  country  would  tend  to  be  that 
of  the  local  banks.  Notes  might  still  stray  widely,  for  uniformity 
of  system  and  design  would  give  them  the  same  ease  of  movement 
among  individuals  as  at  present ;  but  the  proportion  thus  carried 
to  a  distance  would  not  be  great,  and  their  wanderings  would  not 
be  of  long  duration.  The  whole  circulation  would  probably  be  so 
far  localized  that  the  chief  labor  in  every  redemption  centre  would 
be  to  assort  the  notes  issued  in  its  own  district  and  cleared  by  the 
local  banks ;  and  this  would  simplify  and  lighten  a  task  which, 
however  formidable,  would  not  be  too  great  to  be  undertaken  in 
view  of  the  object  to  be  secured. 

Returning  now  to  more  general  considerations,  the  limitation  of 
the  field  of  circulation  to  be  expected  from  a  system  of  actual  re- 
demption deserves  a  little  further  notice.  Existing  banks  of  rela- 
tively large  circulation  might  naturally  dislike  exclusion  from  the 
wide  area  in  which  their  issues  now  find  their  chance  of  long  life. 
So  far  as  their  gain  from  circulation  comes  from  the  supply  of 
currency  for  use  in  remote  sections  or  those  ill  provided  with  bank- 
ing facilities,  they  could  not  be  expected  to  welcome  a  proposition 
to  confine  them  in  effect  to  their  home  districts.  But,  besides  the 
general  equity  of  an  arrangement  which  would  call  upon  any  bank 
to  find  its  chief  field  for  note  issue  in  the  community  with  which  it 


THE  NATIONAL   BANKING   SYSTEM  245 

has  its  closest  relations,  it  is  of  special  importance  for  the  better 
distribution  of  banking  in  the  United  States  that  the  opportunity 
as  well  as  the  legal  right  of  note  issue  should  be  more  widely  ex- 
tended. The  sections  which  now  find  the  national  system  insuffi- 
cient are  those  in  which  the  sparseness  of  population  and  other 
industrial  conditions  invite  the  use  of  bank-notes  and  limit  the  use 
of  bank  credit  in  other  forms.  The  local  banks  require  the  sup- 
port to  be  obtained  from  circulation,  and  it  is  desirable  as  well  as 
equitable  that  they  should  be  able  to  rely  upon  the  support  afforded 
in  their  own  neighborhood.  A  sense  that  the  home  field  belongs 
first  to  the  home  banks  has  shown  itself  in  the  demand  for  the 
relief  of  state  banks  by  the  repeal  of  the  ten  per  cent  tax ;  and  this 
feeling  is  too  well  grounded  to  be  disregarded  with  safety.  Cer- 
tainly, if  the  national  system  is  to  be  extended  and  popularized,  it 
will  be  necessary  that  in  this  respect  the  local  banks  should  be 
made  as  far  as  possible  the  natural  sources  of  supply  for  their  own 
constituencies. 

Whether  the  sections  which  are  now  deficient  in  banks  of  issue 
would  find  their  currency  in  actual  use  greatly  increased  under  the 
changed  conditions  here  suggested  may  be  doubted.  They  are, 
as  a  rule,  in  debt,  — rich  in  possibilities,  but  poor  in  actual  accumu- 
lation. National  banking  with  general  redemption  might,  at  any 
rate,  supply  them  as  well  as  state  banking,  if  the  latter  were  to  be 
on  the  specie  basis ;  but  could  they  under  any  system  find  their 
currency  plentiful  if  it  were  kept  at  its  specie  value .-'  It  is  hard 
to  see  how  the  regular  course  of  payments,  which  now  takes  to  the 
commercial  centres  such  coin,  legal  tender,  or  bank-notes  as  they 
acquire,  could  fail  to  restrict  their  note  circulation  by  drawing 
from  their  banks  their  cash  for  remittance.^     This  hardship  is  the 

1  At  a  hearing  before  the  House  Committee  on  Banking  and  Currency,  December 
19,  1896,  Mr.  W.  L.  Royall,  of  Richmond,  Virginia,  presented  his  views  :  — 

"  Mr.  Royall.  I  say  that,  if  you  put  out  notes  in  a  backwoods  community  that  are 
good  at  par  in  New  York,  those  notes  will  leave  the  backwoods  community,  and  go  to 
New  York.  .  .  . 

"  Mr.  Johnson.  Must  not  those  notes  suffer  a  discount  when  the  holders  of  them 
want  to  go  outside  of  their  own  community  to  make  purchases  with  that  money  in  their 
pockets  ? 

"Mr.  Royall.  No,  sir  :  those  notes  are  payable  in  coin  on  demand.  They  go  to 
the  bank,  and  say,  'Give  me  gold  for  these  notes;'  and  they  get  gold." 

And  again,  favoring  the  issue  of  notes  by  state  banks,  — 

"  Mr.  Royall.     If  [a  bank]  issues  currency  at  all,  it  is  for  the  convenience  of  the 


246  ESSAYS 

natural  consequence  of  economic  conditions  which  for  the  present 
keep  their  demands  for  certain  commodities  constantly  in  advance 
of  their  means  of  payment.  Nevertheless,  good  policy  and  fair 
dealing  alike  require  that  whatever  opportunity  may  in  fact  exist 
for  affording  either  the  present  or  an  increased  supply  of  currency 
should  be  enjoyed  first  by  banks  upon  the  spot.  If  the  lack  of 
active  circulation  remains  as  at  present,  the  nature  of  the  difficulty 
will  at  least  be  clearer  than  it  is  now,  and  will  be  obviously  free 
from  the  present  appearance  of  unjust  discrimination.  Moreover, 
to  give  to  local  banks  all  possible  encouragement  for  natural  devel- 
opment, by  enabling  them  to  use  as  far  as  safety  will  allow  the 
power  of  issue,  notoriously  needed  in  immature  communities  more 
than  in  the  mature,  is  the  readiest  way  to  promote  the  growth  of 
industry  and  wealth,  which  will  finally  raise  the  people  to  the  con- 
dition where  their  need  of  goods  for  use  will  no  longer  keep  them 
bare  of  cash.  At  present  the  condition  of  portions  of  the  South 
and  West  presents  a  kind  of  deadlock.  Their  people  are  poor  in 
all  but  natural  resources.  They  remain  poor  because  there  is  little 
"  money  in  circulation,"  and  there  is  httle  "  money  in  circulation  " 
because  they  are  poor.  With  a  short  succession  of  bad  years  they 
are  in  something  like  destitution.  With  a  bountiful  harvest  they 
gain  a  little  ground,  and  hope  rises.  To  encourage  the  proper  use 
of  credit,  and  of  credit  in  the  form  most  natural  to  their  condition, 
although  a  slow  remedy,  appears  to  be  not  only  a  hopeful  one,  but 
also  the  only  one  now  within  reach  of  the  national  government. 

To  recapitulate  the  points  which  appear  to  be  of  chief  impor- 
tance in  the  current  discussion  :  — 

The  great  objects  to  be  secured  are:  to  enable  sections  of 
country,  now  excluded  from  the  advantages  of  the  national  bank- 
ing system,  altogether  or  in  part,  to  make  use  of  this  system  and 
of  the  right  of  issue  under  it,  as  their  needs  may  require  ;  and  to 
make  the  issues  of  the  national  banks  elastic  as  well  as  safe. 

The  natural  means  for  securing  these  results  are  :  to  abandon 

people  who  live  around  it.  Yet,  if  a  country  bank  issues  currency  backed  by  the  gov- 
ernment, that  currency  will  leave  it  and  the  people  who  really  need  it,  and  go  to  a  com- 
mercial centre,  where  there  is  no  legitimate  need  for  it." 

Mr.  Royall's  cure  for  the  difficulty  appeared  to  be  an  issue  of  notes,  not  too  good, 
but  just  good  enough  to  be  used  at  home,  —  a  difiacult  medium  to  strike. 


THE   NATIONAL   BANKING   SYSTEM  247 

the  present  system  of  bond  deposit  as  security  for  notes,  to  sub- 
stitute a  first  lien  in  favor  of  note-holders  upon  all  assets  and  upon 
the  stockholders'  liability,  and  to  create  a  guarantee  fund  supported 
by  levy  upon  all  banks  in  proportion  to  their  circulation ;  to 
strengthen  the  system,  by  provision  for  closer  inspection  and  by 
more  frequent  publication  of  accounts  ;  to  authorize  and  encourage 
the  introduction  of  the  branch  system,  at  the  same  time  raising  the 
line  of  minimum  capital,  say,  to  $200,000 ;  and  to  organize  a  sys- 
tem of  central  redemption,  enforced  by  restriction  upon  the  right 
of  banks  to  pay  out  the  notes  of  other  banks. 

The  practical  and  political  difficulties,  at  present  hindering  any 
reform,  need  no  comment.  Factions  in  Congress,  apathy  produced 
by  a  new  period  of  prosperity,  popular  financial  delusion,  and 
differences  of  opinion  among  the  friends  of  reform  may  raise  for- 
midable obstacles  in  the  way  even  of  partial  measures,  and  still 
more  in  the  way  of  any  comprehensive  plan,  for  the  removal  of 
generally  acknowledged  evils.  But,  whatever  steps  it  may  be 
possible  to  take,  little  will  be  gained  if  they  do  not  turn  plainly 
towards  the  objects  above  stated,  and  proceed  courageously  and 
unequivocally  upon  the  general  lines  which  the  present  writer, 
following  many  others,  has  reviewed  in  these  pages. 


CAN   WE   KEEP   A   GOLD   CURRENCY  ?  i 

No  previous  year  in  our  history  has  seen  such  an  increase  of 
the  stock  of  gold  in  the  United  States  as  that  which  marks  1898. 
Our  product  for  the  year  is  beheved  to  have  exceeded  that  of  the 
richest  period  of  the  CaHfornia  discoveries,  our  imports  surpassed 
by  fifty  per  cent  the  highest  sum  ever  before  reported  by  our  cus- 
toms records,  and  these  enormous  receipts  were  offset  only  to  an 
unimportant  extent  by  exports.  Looking  at  the  influx  from 
abroad,  it  is  safe  to  say  that  no  commercial  nation  has  ever  before 
received  such  a  mass  of  gold  in  a  single  twelvemonth  for  the 
supply  of  its  own  requirements.  Taking  our  mining  product  and 
imports  together,  our  total  receipts  in  1898  exceeded  even  those 
of  England,  the  great  distributing  reservoir  of  gold,  which  also 
then  reached  their  highest  point. 

Although  the  course  of  trade  which  produced  this  remarkable 
result  is  sometimes  spoken  of  as  if  it  betokened  some  radical 
change  in  our  commercial  relations,  careful  examination  will  show 
it  to  have  been  the  consequence  of  precisely  the  same  influences 
as  those  previously  at  work  in  our  foreign  dealings.  Allowing  for 
changes  wrought  by  eighteen  years  of  rapid  national  growth,  the 
course  of  our  foreign  trade  from  the  fall  of  1896  bears  a  strong 
resemblance  to  the  wonderful  tide  ending  in  1881,  which  estab- 
lished the  permanence  of  the  specie  payments,  undertaken  with 
such  doubtful  prospect  of  success  at  the  beginning  of  1879.  In 
both  cases  the  United  States  were  able  to  command  gold  until 
every  reserve  and  depository  was  overflowing. 

Still,  at  the  bottom  of  much  of  the  current  discussion  of  finan- 
cial questions,  there  is  often  found  a  doubt,  express  or  implied,  as 
to  the  ability  of  the  people  of  the  United  States  to  maintain  a  cur- 
rency on  the  gold  standard.  This  doubt  relates  to  something  more 
than  our  present  ability  to  hold  gold,  with  our  paper  currency  in 
the  top-heavy  condition  to  which  it  has  been  brought  by  thirty 

'  Quarterly  Journal  of  Economics,  h^x'X,  1899. 
248 


CAN   WE    KEEP    A   GOLD    CURRENCY  ?  249 

years  of  haphazard  legislation.  It  involves  the  much  broader 
question  whether  there  is  not  something  in  the  economic  charac- 
teristics or  relations  of  this  country,  as  compared  with  the  other 
great  commercial  nations,  which  makes  it  difficult,  perhaps  impos- 
sible, for  us  to  retain  permanently  what  might  otherwise  be 
regarded  as  our  natural  proportion  of  the  world's  stock  of  money. 

It  is  hardly  surprising  that  this  doubt  should  sometimes  spring 
up.  As  no  part  of  our  financial  system  now  works  according  to 
expectation,  we  have  nearly  the  whole  of  the  export  demand  for 
gold  concentrated  upon  the  Treasury.  Any  cause  which  lowers 
the  gold  balance  in  the  Treasury,  whether  it  be  an  unusual  demand 
for  the  redemption  of  notes  or  a  deficiency  of  revenue,  weakens  the 
sometimes  narrow  foundation  on  which  our  paper  currency  stands ; 
and,  as  there  is  no  provision  for  systematic  repair,  the  possibility 
of  a  suspension  of  gold  payments  by  the  government  instantly 
comes  to  mind.  For  the  greater  part  of  the  time,  in  the  last  eight 
or  ten  years,  the  attention  of  the  public  has  been  fixed  upon  the 
Treasury  balance.  Any  movement  in  the  wrong  direction  has  been 
viewed  with  alarm,  any  demand  for  the  redemption  of  legal  tender 
notes  has  come  to  be  described  as  a  "  raid,"  the  export  of  gold  has 
become  an  event  of  black  significance.  The  line  to  be  drawn 
between  the  embarrassments  caused  by  remediable  defects  of  sys- 
tem and  those  springing  from  some  inherent  financial  incapacity 
of  the  nation,  is  not  always  made  out  with  ease  ;  and  we  can  hardly 
wonder,  therefore,  that  the  doubt  whether,  under  any  arrangement 
of  the  currency,  we  can  expect  to  hold  our  own  in  the  competition 
of  international  exchanges  should  sometimes  gain  ground.  It  is 
on  the  fundamental  question  thus  presented  that  I  now  propose 
to  offer  a  few  considerations. 

The  general  advantages  with  which  the  United  States  enter 
the  field  of  international  trade  are  manifestly  such  as  to  raise  a 
strong  presumption  in  favor  of  our  ability  to  maintain  a  gold  cur- 
rency, if  we  will,  —  a  presumption  to  be  controlled,  if  at  all,  only 
by  showing  the  existence  of  some  highly  exceptional  disqualifying 
condition.  We  have  a  territory  of  remarkable  productive  capacity, 
already  developed  to  such  a  point  as  to  place  us  in  the  first  rank 
as  a  producing  country.  Our  people  have  the  qualities  needed  for 
the  most  effective  use  of  this  source  of  material  wealth,  and  are 
practically  free  from  the  burdens  of  debt  and  armaments  which 


250 


ESSAYS 


fetter  the  energies  of  most  of  our  rivals.  Our  industries  are 
varied  and  highly  organized ;  our  industrial  outfit  for  the  produc- 
tion, transportation,  and  exchange  of  goods  is  vast  in  extent,  and 
in  many  branches  of  unprecedented  excellence ;  and  our  accumu- 
lation of  capital  has  been  extraordinary  in  rapidity  and  amount, 
as  is  evidenced,  significantly  for  the  present  purpose,  by  the  sup- 
ply of  gold  in  our  hands,  which,  by  the  mode  of  estimate  followed 
by  the  Treasury,  must  now  largely  exceed  $900,000,000.  To  all  this 
is  to  be  added  the  fact  that  the  United  States  have  long  been  the 
first  gold-producing  country  in  the  world,  and  that,  if  we  now  take 
the  second  place,  this  is  not  because  our  own  annual  supply  has 
fallen  off,  but  because  that  of  South  Africa  has  come  into  existence. 

If  now  we  seek  for  a  possible  disqualifying  condition,  tending 
to  defeat  the  presumption  created  by  these  solid  advantages, 
original  and  acquired,  we  must  look  for  it  either  in  the  trade  in 
merchandise  carried  on  by  this  country  with  others,  or  in  our 
strictly  financial  transactions  with  the  rest  of  the  world.  It  is 
only  in  dealings  of  these  two  kinds  that  we  receive  gold  or  part 
with  it,  on  any  great  scale,  and  it  is  therefore  in  one  or  the  other 
set  of  relations  thus  created  that  any  such  exceptional  character- 
istic as  is  now  sought  for  must  exist. 

Taking  into  consideration,  first,  the  economic  character  of  our 
exchange  of  merchandise  with  other  countries,  it  is  clear  that,  as 
regards  the  movement  of  gold,  the  position  of  the  United  States  is 
one  of  singular  advantage.  This  fact  we  recognize  in  our  confident 
moods,  but  are  inclined  to  overlook  in  the  presence  of  any  financial 
difficulty.  Summarily  stated,  the  advantage  consists  in  this,  —  that 
our  demand  for  the  goods  of  other  nations  is,  on  the  whole,  far  less 
intense  than  their  demand  for  ours.  This  is,  doubtless,  at  variance 
with  much  that  is  often  said  as  to  our  tendency  to  over-importation ; 
but  the  truth  of  the  statement  is  demonstrated  by  well-recognized 
facts,  of  which  the  history  of  1893  offers  a  convenient  illustration. 

The  crisis  of  that  year  came  on  so  late  in  the  spring  that  the 
imports  for  the  fiscal  year  ending  with  June  show  little  trace  of  its 
effects  ;  and  their  net  amount,  $849,800,000,  is  one  of  the  highest 
then  recorded.  Under  the  pressure  of  the  revulsion  our  imports 
for  the  next  fiscal  year,  1893- 1894,  fell  more  than  $211,000,000. 
A  sudden  change  of  that  magnitude  necessarily  implies  some  ex- 
traordinary alteration  of  economic  conditions,  and  great  individual 


CAN  WE  KEEP  A  GOLD  CURRENCY?         25 1 

hardship  as  the  result;  but  it  also  implies  a  wide  range  of  adjust- 
able demand,  previously  satisfied  by  imported  goods.  The  nature 
of  this  demand  is  disclosed  by  the  classification  of  imports  in  the 
Treasury  returns.  Under  Class  I.,  articles  of  food  (of  which  seven- 
eighths  were  made  up  by  sugar,  tea,  coffee,  and  fruits),  there  was 
an  increase  of  imports  in  1893-1894,  amounting  to  over  ^6,000,000  ; 
under  Class  II,,  crude  materials  for  domestic  industry,  there  was  a 
drop  of  forty  per  cent,  or  nearly  1^90,000,000;  under  Class  III., 
partially  manufactured  materials  imported  for  further  manufacture, 
there  was  a  fall  of  thirty-one  per  cent,  or  a  little  more  than 
;^30,ooo,ooo  ;  under  Class  IV.,  manufactured  goods  for  consumption, 
there  was  a  fall  of  thirty-five  per  cent,  or  $51,000,000  ;  and  under 
Class  v.,  luxuries,  including  silks,  laces,  tobacco,  wines,  and  liquors, 
there  was  a  fall  of  over  thirty-six  per  cent.,  or  $46,000,000. 

These  figures  tell  a  plain  story  of  enforced  economy,  by  which 
a  great  people,  under  the  pressure  of  a  revulsion,  changed  for  the 
time  the  scale  and  the  distribution  of  their  demands  for  consump- 
tion, slackened  the  productive  machinery  which  supplied  some 
great  classes  of  demand,  and  undertook  to  live  within  their  present 
available  means.  So  far  as  our  foreign  trade  was  concerned,  this 
economy  was  practised,  not,  indeed,  with  ease,  but  chiefly  by  cut- 
ting off  the  superfluities  and  the  dispensable  comforts  of  life  and 
the  material  for  their  production,  without,  however,  sacrificing  the 
articles  of  necessary  consumption,  or  even  "  the  free  breakfast 
table."  Under  similar  pressure  in  other  years  the  shrinkage  of 
our  demand  has  followed  a  similar  course,  marking  a  high  degree 
of  control  on  our  side  of  the  international  trade. 

If  we  look  at  the  other  side  of  the  trade,  and  examine  the 
demands  made  upon  the  United  States,  we  find  that  cotton,  bread- 
stuffs,  cattle,  and  provisions  made  up  two-thirds  of  our  domestic 
exports  in  1893  and  nearly  two-thirds  in  1894,  the  total  rising  from 
$831,000,000  in  the  former  year  to  $869,000,000  in  the  latter.  In 
neither  year  were  our  exports  of  these  leading  articles  at  their 
highest.  Our  cotton  crop  fell  off  in  1893  by  more  than  2,000,000 
bales,  and  our  yield  of  wheat  fell  in  1894  by  more  than  100,000,000 
bushels.  But  the  foreign  demand  for  these  products  is  plainly  not 
a  controllable  demand  in  the  same  sense  in  which  our  demand  for 
manufactures  is  controllable.  The  demand  for  cotton  is  as  con- 
tinuous as  that  for  any  article  of  consumption  can  be.     Although 


252 


ESSAYS 


our  exports  vary  with  the  abundance  of  our  crop,  the  purchases  of 
Great  Britain  in  a  long  series  of  years  show  great  steadiness ;  and 
the  United  States  still  send  to  that  chief  customer  as  large  a  pro- 
portion of  her  annual  supply  as  they  did  before  the  Civil  War. 
Our  cotton,  in  short,  finds  its  market  in  bad  years  as  well  as  in 
good.  It  supplies  the  indispensable  material  for  a  vast  industry, 
which  may  indeed  flag  in  bad  times,  but  cannot  stop.  Our  exports 
of  food,  which  are  now  seldom  below  $300,000,000,  swell,  of  course, 
with  any  deficiency  of  crops  in  Europe.  The  demand  for  them  is 
imperative  within  the  limits  set  by  other  sources  of  supply,  and, 
when  strengthened  by  the  deficiency  of  those  sources,  is  neither  to 
be  satisfied  by  a  substitute  nor  to  be  reduced  by  economy  of  con- 
sumption. It  may  be  said,  therefore,  of  our  great  exports,  that  the 
demand  made  upon  us  for  cotton  is  constant  and  imperative,  and 
that  the  demand  for  breadstuffs  and  provisions,  though  irregular, 
is  always  large  and  often  of  remarkable  intensity. 

The  extraordinary  movement  of  gold  to  this  country  beginning 
in  1896  is  the  latest  proof  of  the  importance  of  this  characteristic 
of  the  relative  demands  of  the  United  States  and  of  the  other  lead- 
ing commercial  nations.  Illustrations  to  the  same  effect,  however, 
can  easily  be  found  in  the  statistics  of  our  foreign  trade,  all  going 
to  show  that,  while,  like  any  rapidly  developing  nation,  we  often  by 
large  imports  strain  our  ability  to  pay,  any  severe  pinch  finds  us 
able  to  forego  a  large  amount  of  purchases,  —  which,  after  all,  are 
not  for  the  supply  of  imperative  wants,  —  and  thus  to  check  the 
outflow  of  gold ;  and  that,  on  the  other  hand,  the  urgent  demands 
made  upon  us  frequently  turn  the  current  of  gold  in  our  direction 
with  amazing  force.  That  these  urgent  demands  are  irregular  is 
an  undeniable  drawback  to  the  advantage  which  we  enjoy.  Our 
command  of  the  situation,  which  is  now  intermittent,  might  no 
doubt  be  constant,  and  the  change  in  the  volume  of  our  trade  less 
serious,  if  the  need  for  our  products  were  always  felt  at  its  maxi- 
mum by  our  chief  customers.  This  irregularity,  however,  is  the 
condition  annexed  to  the  enjoyment  of  a  resource  which  has  no 
parallel  in  the  commerce  of  the  world.^     How  far  it  can  be  thought  to 

1  The  extent  of  the  irregularity  may  be  seen  by  the  foUownng  statement  of  the  per- 
centage ratio  of  the  annual  export  of  breadstuffs,  provisions,  and  food  animals  compared 
with  the  mean  for  the  last  ten  years  :  — 

1889       1890       1891        1892       1893       1894       1895       1896       1897       1898 
.69  .91  .84         1.34        1.03         .98         .76         .88         1.05        1.52 


I 


CAN   WE   KEEP   A   GOLD   CURRENCY?  253 

place  us  at  a  disadvantage  compared  with  other  countries  as  regards 
ability  to  retain  a  gold  currency  will  be  seen  more  plainly  when  we 
come  to  consider  the  actual  movements  of  gold  to  and  from  the 
leading  nations  respectively.  For  the  present  it  is  enough  to  point 
out  the  strong  probability  that  a  trade  in  which  we  buy  for  the 
satisfaction  of  our  own  secondary  wants  and  sell  chiefly  to  supply 
the  primary  needs  of  others,  whether  the  course  of  this  trade  be 
uniform  or  not,  gives  us  a  position  of  exceptional  advantage. 
It  is  at  any  rate  certain  that  it  presents  no  reason  for  concluding 
that  the  United  States  have  any  particular  incapacity  for  retaining 
gold. 

Turning  now  to  the  other  quarter  in  which  any  disqualifying 
condition  for  maintaining  a  gold  currency  must  be  sought,  —  the 
strictly  financial  relations  of  this  country  with  others,  —  we  have  to 
deal  with  a  state  of  things  far  more  complex  than  that  already 
considered,  in  which  misconception  is  far  easier.  Extraordinary 
rapidity  of  development  and  the  possession  of  resources  which 
offer  a  vast  field  for  investment  have  made  the  United  States  the 
greatest  borrower  in  the  modern  world.  In  saying  this  of  our  peo- 
ple as  a  community,  the  word  "  borrow  "  is  used  in  a  wide  sense,  to 
include  all  the  forms  in  which  foreign  capital  is  employed  within  our 
limits  in  uses  to  which  domestic  capital  must  otherwise  have  been  ap- 
plied. Whatever  form  the  evidence  of  the  transaction  may  assume, 
whether  it  be  found  in  national,  state,  corporation,  or  individual 
indebtedness,  in  the  bonds  or  in  the  stocks  of  railways  or  industrial 
enterprises,  or  in  the  private  ownership  of  manufacturing  establish- 
ments,—  in  all  these  cases  and  under  many  other  disguises,  the 
people  of  the  United  States  as  a  whole  are  employing  foreign 
capital  in  the  support  of  their  general  system  of  industry.  The 
interest,  the  dividends,  or  the  current  profits,  if  any,  are  the  reward 
of  the  lender :  the  general  gain,  convenience,  and  stimulus  coming 
from  the  development  of  a  particular  resource  or  industry,  or  from 
the  more  rapid  and  symmetrical  development  of  our  system  as  a 
whole,  inures  to  the  advantage  of  our  own  community.  Borrowing 
in  this  sense  we  have  carried  on  for  a  century  upon  an  ever 
increasing  scale,  and  shall  doubtless  long  continue  to  carry  on, 
unless  we  wantonly  sacrifice  our  unexhausted  ability  for  vigorous 
advance. 

As  great  debtors,  in  this  large  sense,  the  United  States  have 


254  ESSAYS 

necessarily  great  payments  to  be  made  to  their  creditors,  —  to  be 
made  according  to  the  standard  of  the  commercial  world,  and 
therefore  called,  conveniently  enough,  gold  payments.  This  con- 
sequence of  our  position  as  a  debtor  nation  is  habitually  spoken  of 
as  a  perpetual  drain  upon  our  stock  of  gold  and  as  a  necessary 
hindrance  to  the  maintenance  of  a  gold  currency.  And  yet  noth- 
ing is  more  certain  than  the  fact  that  the  interest,  dividends,  and 
profits  upon  foreign  capital  employed  in  our  industries  are  no  more 
a  drain  upon  our  gold  than  any  other  debts  to  be  paid  in  the  mar- 
kets of  the  world.  They  no  more  require  the  export  of  gold  than 
a  payment  for  goods  or  securities ;  and  even  if  by  their  terms  the 
payment  is  to  be  made,  not,  we  will  say,  in  pounds  sterling,  but 
specifically  in  gold  coin,  neither  the  obligation  nor  the  mode  of  its 
execution  differs  from  that  of  the  payments  habitually  made  in 
foreign  trade.  It  is  not,  even  in  this  case,  the  actual  transporta- 
tion of  metal  across  the  Atlantic  that  is  called  for,  but  the  payment 
of  metal  in  London,  Paris,  or  Frankfort,  the  debtor  providing  the 
means  of  payment  at  that  place  as  he  finds  easiest,  —  by  selling 
American  wheat  or  cattle,  or  perhaps  by  a  fresh  loan.^  In  fact,  in 
the  actual  process  of  settlement,  one  international  liability  is  like 
another.  They  all  take  their  place  among  the  conditions  which 
regulate  the  barter  of  commodities  between  nations,  stimulating 
sales  here  and  discouraging  them  there,  and  thus  by  their  action  on 
the  relative  level  of  prices  requiring  habitually  only  the  clearing  of 
comparatively  moderate  balances.  "  Gold  interest "  and  the  like, 
in  the  settled  course  of  trade,  simply  call  for  the  regular  export  of 
a  larger  amount  of  salable  commodities,  the  proceeds  of  which  are 
finally  converted,  in  the  foreign  market,  into  that  medium  which 
secures  the  execution  of  the  contract  for  foreign  interest  pay- 
ments. 

Without  further  exposition  of  these  familiar  facts,  it  is  enough 
for  the  present  purpose  to  point  out  that,  although  a  systematic 
course  of  foreign  payments  on  a  large  scale  may  have  much  to  do 
with  the  habitual  level  of  prices  in  the  country  making  the  pay- 
ments, it  has  no  tendency  to  strip  the  country  of  the  gold  neces- 

'  Thus  the  Geneva  award  of  1872  rec|uirecl  the  payment  of  ^15,500,000  by  England 
to  the  United  States  "  in  K"'''-"  The  gold  was  paid  to  the  Treasury,  but  the  transfer 
across  the  Atlantic  was  made  liy  a  shipment  of  United  States  bonds  which  had  been  called 
for  payment.     F.  W.  Ilackett,  "The  Geneva  Award  Acts,"  p.  176. 


CAN   WE   KEEP   A   GOLD   CURRENCY?  255 

sary  to  carry  on  its  home  transactions  upon  what  has  become,  for 
it,  the  normal  level.  It  is  only  when  we  come  to  the  return  of  bor- 
rowed capital,  or  to  the  transfer  in  either  direction  of  securities 
which  represent  debts,  that  we  find  in  the  relations  of  the  borrower 
anything  that  can  be  treated  as  a  permanent  disturbing  element. 
Indeed,  the  return  of  borrowed  capital,  or,  in  other  words,  the  pay- 
ment of  debt,  can  also  be  set  aside  as  little  likely  in  practice  to  be 
the  cause  of  serious  disturbance,  so  steadily  is  cancelled  debt  re- 
placed by  fresh  borrowing.  It  is  the  transfer  of  securities  as 
investments  or  for  speculative  purposes,  sometimes  in  large  masses, 
acting  as  an  unseen  import  or  export,  and  therefore  calling  for 
settlement  in  precisely  the  same  way  as  a  movement  of  merchan- 
dise, that  is  most  important  from  the  present  point  of  view.  It  is 
this  which,  at  all  events,  appears  to  be  the  cause  of  most  frequent 
anxiety  as  to  the  drain  of  specie.  The  possibility  that,  at  some 
moment  of  stress  on  one  side  of  the  water  or  the  other,  stocks  and 
bonds  to  an  unknown  amount  may  be  launched  by  London  upon 
the  New  York  market,  creates  a  vague  apprehension,  all  the  more 
disturbing  because  the  facts  involved  can  never  be  measured  with 
precision. 

No  doubt  the  great  class  of  "  international  securities,"  which 
have  so  important  a  place  in  the  operations  of  modern  finance, 
while  they  facilitate  settlements  and  make  transactions  easy  which 
would  otherwise  be  impossible,  at  the  same  time  often  make  the 
movements  of  commerce  unsteady,  and  increase  the  swiftness  and 
intensity  of  their  changes.  This,  again,  is  a  drawback  suffered  for 
the  sake  of  great  benefits  enjoyed,  the  world  being,  on  the  whole, 
immeasurably  the  gainer.  In  the  use  of  these  securities  the  United 
States  have  a  leading  share,  not  only  because  of  the  extent  of  their 
general  dealings,  but  because  so  large  an  amount  of  the  securities 
are  issued  and  domiciled  in  this  country,  and  so  find  a  natural 
market  here.  It  is  not  probable,  however,  that,  either  in  the  gen- 
eral trade  of  the  world,  or  in  our  particular  trade,  the  movements 
of  gold  have  been  increased  by  the  dealings  in  this  kind  of  prop- 
erty. On  the  contrary,  it  is  more  probable  that,  Hke  any  other 
improvement  which  introduces  new  varieties  of  desirable  exports, 
the  increased  movement  of  securities  has,  on  the  whole,  tended  to 
diminish  the  transfers  of  gold  relatively  to  the  value  of  goods  ex- 
changed, and  that  this  relative  diminution  has  been  felt   in  the 


256  ESSAYS 

trade  of  the  United  States,^  although  with  our  growth  the  absolute 
amount  both  of  goods  and  of  gold  has  vastly  increased. 

But  our  present  inquiry  is  whether  the  dealings  in  international 
securities  make  the  hold  of  the  United  States  upon  a  specie  cur- 
rency weaker  than  that  of  other  countries  which  successfully 
maintain  such  a  currency.  It  would  be  strange  if  this  were  the 
case ;  for,  as  they  sell  what  we  buy  and  buy  what  we  sell,  any  dis- 
turbing tendency  felt  by  us  must  also  be  felt  by  them  at  some  stage 
in  the  series  of  operations.  London,  for  example,  is  a  buyer  when 
New  York  sells  and  a  seller  when  New  York  buys,  having  the  same 
sensitiveness  to  an  outflow  of  gold  and  even  greater  anxiety  as  to 
the  sufficiency  of  the  export  trade  to  counteract  any  serious  drain. 
If,  on  the  whole.  New  York  is  weakened  by  this  class  of  opera- 
tions, often  no  doubt  highly  speculative,  is  not  London  also  weak- 
ened by  a  similar  process  ?  Do  we,  in  fact,  lose  anything  in  the 
comparison  of  our  position  and  its  advantages  with  those  of  the 
country  which  for  nearly  eighty  years  has  maintained  a  sound 
specie  currency  without  interruption  ?  The  truth  is  that  on  each 
side  of  the  water  international  securities,  when  imported,  are  an 
import  of  the  class  not  necessary  for  the  satisfaction  of  any 
imperative  want,  and  are  bought  therefore  because  the  purchase  is 
likely  to  be  profitable,  and  when  exported,  are  sold,  if  at  all,  for 
such  price  as  the  purchaser  judges  to  be  for  his  advantage.  The 
disadvantage  of  having  them  crowded  for  sale  upon  the  home 
market,  so  often  dwelt  upon  in  discussion  in  this  country,  is,  at  all 
events,  slight  in  comparison  with  the  disadvantage  suffered  by  the 
country  which  finds  itself  compelled  to  make  unusual  purchases  of 
food  or  of  any  great  staple  for  manufacture. 

It  is  convenient,  at  this  point  in  our  discussion,  to  consider 
briefly  the  special  advantage,  as  compared  with  the  United  States, 


1  In  the  last  five  decades  the  aggregate  imports  and  exports  of 

merchandise  by  the 

United  States,  compared  with  their  aggregate  import  and  export  of 

gold 

have  been  as 

follows  :  — 

Merchandise                           Gold 

Perc 

TO 

entage  of  gold 
Merchandise 

1849-1858     .     . 

.     .     ^4,621,000,000                 $389,000,000 

.0842 

1859-1868     .     . 

.     .       5,641,000,000                   704,000,000 

.1248 

1869-1878     .     . 

.     .      10,118,000,000                   530,000,000 

.0524- 

1879-1888     .     . 

.      .      14,098,000,000                   571,000,000 

.0405 

I 889- I 898     .     , 

.     .      16,848,000,000                1,094,000,000 

.0649  + 

The  exceptional  conditions  of  the  second  and  fifth  decades  require  no  comment. 


CAN   WE   KEEP   A   GOLD   CURRENCY  ? 


257 


which  England  is  often  said  to  derive  from  her  peculiar  position  as 
a  commercial  nation.  "  England,"  it  is  said,  "  being  the  great 
creditor  country  of  the  world,  can  draw  gold  as  she  pleases  from 
any  quarter,  whereas  this  is  a  debtor  country,  never  secure  against 
demands  from  abroad."  This  idea  of  the  practical  command  of 
the  gold  of  the  world  lying  in  the  hands  of  the  great  creditor,  per- 
haps owes  its  origin  partly  to  the  fact  that  the  commercial  relations 
of  England  make  her  the  agency  through  which  a  large  part  of  the 
gold  produced  by  the  United  States,  Australasia,  and  South  Africa 
finds  its  way  into  the  currency  of  the  world  at  large,  and  partly  to 
the  visible  movements  of  that  great  financial  barometer,  the  Bank 
of  England  rate.  It  is  true  that  her  function  as  the  distributer  of 
gold  does  not  enable  England  to  retain  more  than  a  rather  small 
proportion  of  what  comes  into  her  hands.  It  is  also  true  that  the 
sliding  scale  of  discount,  by  which  the  Bank  of  England  protects 
its  own  reserve  and  is  apt  to  give  the  signal  for  the  London  market 
generally,  is  a  means  of  defence  in  no  way  peculiar  to  that  institu- 
tion. It  is  used  systematically  and  quite  as  effectively  by  the  Ger- 
man Reichsbank.  The  apparent  neglect  of  it  by  the  Bank  of 
France  is  due,  partly  to  the  fact  that  the  enormous  stock  of  metal 
in  the  bank  enables  it  to  yield  up  gold,  if  need  be,  to  a  great 
amount  with  no  sensible  inconvenience,  and  partly  to  the  fact  that, 
by  charging  a  premium  upon  gold,  the  bank  is  able  to  mask  its 
defensive  policy,  and  to  preserve  a  generally  "uniform  rate  of  dis- 
count with  little  regard  to  an  outflow  of  money.  The  English 
method  may  in  fact  be  seen  at  work  in  our  own  country,  in  a  less 
definite  form,  but  with  similar  effect,  in  the  changing  rates  of 
interest  prevailing  in  the  great  money  centres.^  Nevertheless,  the 
facts  that  the  great   streams  of   gold  converge  in  England  and 

1  The  following  extract  is  from  the  hearing  before  the  House  Committee  on  Banking 
and  Currency,  1897-1898,  Hon.  C.  S.  Fairchild  being  under  examination  :  — 

"Mr.  Fairchild  [referring  to  the  raising  of  its  rate  by  the  Bank  of  England]. 
Now  in  this  country  the  same  thing  takes  place  when  a  man  borrows  a  million  dollars 
to  pay  a  debt  abroad.  It  makes  a  diminution  of  the  loanable  funds,  and  that  of  itself 
works  an  increase  in  the  rate  of  interest ;  and,  when  that  rate  of  interest  becomes  large 
enough,  the  seller  of  exchange,  instead  of  meeting  his  remittances  by  the  actual  ship- 
ment of  gold,  finds  a  cheaper  way  to  meet  his  bill  of  exchange.  We  do  not  have  to 
have  any  specific  measures  to  clothe  banks  with  specific  power  to  do  that.  It  does 
itself.  It  is  one  of  the  natural  laws  which  works  itself  out ;  and,  if  we  do  not  put  any 
impediment  in  the  way,  it  will  take  care  of  itself.     That  is  my  judgment  about  it. 

"Secretary  Gage.     I  agree  with  what  Mr.  Fairchild  has  said."     Report,  p.  135. 
s 


258  ESSAYS 

diverge  from  her,  and  that  the  Bank  of  England  conspicuously 
acts  with  reference  to  them,  are  enough  to  account  for  the  general 
impression  that  the  controlling  power  is  to  be  found  there. 

But,  besides  these  crude  conceptions  of  the  practical  working 
of  English  commerce,  there  is  something  more  implied  in  the 
common  idea  of  England  as  "a  creditor  country."  A  creditor 
can  call  for  the  payment  of  debts  due  to  him,  and  can  require 
payment  in  money.  Cannot  England,  then,  call  in  her  dues  in 
gold,  the  world's  money  .■'  Of  the  fallacies  involved  in  this  argu- 
mentative question,  let  us  consider  the  fallacy  of  personifying 
England,  —  of  saying  "England"  when  we  really  mean  "some 
Englishmen."  By  a  figure  of  speech  the  country  is  presented  to 
the  mind  as  a  community  having  a  single  directing  will,  a  single 
interest  and  determining  purpose,  extending  credit  or  collecting 
debts  from  definitely  formed  policy,  and  capable  of  saying  to  itself 
upon  occasion  that  gold,  and  not  commodities,  must  now  be  secured 
in  payment.  This  might  be  true,  in  a  degree,  if  the  EngUsh  poHty 
were  communistic,  and  if  a  committee  directed  the  operations  of 
the  banks,  the  commerce,  and  the  manufactures  of  England,  and 
made  provision  for  her  daily  consumption.  But  the  real  case  to 
be  kept  in  mind  is  that  in  which,  instead  of  a  single  conscious  will 
governing  her  action,  there  are  some  millions  of  individual  wills, 
each  determining  within  its  own  sphere ;  and,  instead  of  a  single 
clear  line  of  chosen  policy,  there  is  only  the  confused  outcome  of 
the  varying  interests  and  needs  of  vast  numbers  of  men. 

In  this,  the  actual  state  of  things,  the  demand  of  one  class  of 
the  population  for  cotton  to  spin,  and  the  demand  of  others  for 
wheat  or  for  beef,  are  not  and  cannot  be  subordinated  to  the  desire 
which  any  set  of  men  or  of  institutions  may  feel  to  see  gold  flow 
in.  On  the  contrary,  the  requirements  for  consumption,  deter- 
mined by  the  occupations  and  relations  of  a  great  people,  are  funda- 
mental conditions,  to  which  financial  interests  and  policies,  under 
whatever  name,  must  of  necessity  conform  their  action.  For  illus- 
tration we  need  not  go  farther  back  than  the  great  export  move- 
ment of  1896,  which  between  August  i  and  December  i  brought 
into  the  United  States  $74,000,000  of  gold,  $40,000,000  of  it  coming 
from  England.  Although  the  Bank  of  England  in  seven  weeks 
raised  its  rate  from  two  per  cent  to  four,  it  could  not  stop  the  outflow 
which  in  four  months  drained  one-fourth  of  its  specie  from  its  vaults, 


CAN   WE   KEEP   A  GOLD   CURRENCY  ?  259 

so  uncontrollable  are  the  currents  which  take  their  rise  in  the  needs 
and  habits  of  a  whole  people.  The  great  trade  movements  of  a 
country  like  England  can  never  be  concerted  or  calculated  move- 
ments, as  the  language  used  about  them  often  seems  to  imply. 
They  are  the  result  of  forces  quite  independent  of  each  other  in 
origin  and  often  in  strong  conflict,  which  the  small  fraction  of  men 
known  as  the  financial  world  cannot  withstand  or  govern,  but  which 
they  can  often  turn  to  account.^ 

These  considerations  —  no  doubt  sufficiently  obvious,  but  often 
neglected  —  apply  to  the  action  of  England  as  a  purchaser  of 
merchandise  from  other  countries.  They  also  have  a  close  ap- 
plication to  her  action  as  a  holder  of  the  securities  of  other  coun- 
tries. The  class  of  Englishmen  who  hold  foreign  bonds  or  stocks 
as  an  investment  will,  no  doubt,  act  at  times  under  a  common  im- 
pulse of  confidence  or  distrust,  as  investors  do  in  our  own  country. 
This  action  may  seriously  disturb  the  financial  relations  of  their 
own  country  with  others  and  affect  the  movement  of  gold  for  a 
time,  between  England  and  this  country,  for  example,  as  it  has 
been  seen  to  do.  This  is,  of  course,  to  be  noted  as  an  element  of 
instability  in  our  international  finance,  which  must  be  recognized, 
although  there  may  be  a  question  whether  a  set  of  trade  relations, 
which  already  include  many  unstable  elements,  is,  in  fact,  made 
any  more  unstable  by  the  introduction  of  another  class  of  variables, 
with  its  chances  of  compensatory  action.  But  it  concerns  us  to 
notice  that  this  action  of  English  investors,  although  the  result  of 
a  common  impulse,  is  no  more  a  concerted  action  than  the  move- 
ment in  which  English  mill-owners  buy  cotton,  eagerly  or  sparingly, 
as  the  case  may  be.  It  is  the  action  of  a  great  body  of  individuals, 
seeking  advantageous  employment  each  for  his  own  capital,  en- 
couraged or  disheartened  by  current  opinion  as  to  American 
securities,  and  neither  bidding  against  each  other  nor  selling  at  a 
loss  in  order  to  affect  the  general  money  market  or  turn  the  stream 
of  gold.  Even  the  class  of  bankers  and  other  temporary  holders 
of  securities  for  speculative  profit  —  a  class  of  men  as  little  disposed 

^  How  impossible  it  is  even  for  a  syndicate  comprising  "  every  banking  house  and 
every  bank  in  New  York  City,  with  important  European  connections,"  to  control,  be- 
yond certain  limits  of  time  and  favoring  circumstances,  the  course  of  foreign  exchange, 
is  well  shown  by  Mr.  Noyes  in  his  account  of  the  gold  movement  in  1895.  "Thirty 
Years  of  American  Finance,"  ch.  x. 


260  ESSAYS 

as  any  to  sell  their  property  at  a  sacrifice  —  act  in  the  same  man- 
ner, according  to  the  dictate  of  individual  interest,  and  under  no 
leadership  or  control  which  could  justify  the  conception  of  concert 
and  dangerous  singleness  of  aim,  which  we  have  been  considering. 

It  is  perhaps  hardly  necessary  to  point  out  that,  when  we  thus 
take  into  account  the  complex  influences  which  must  at  any  given 
time  determine  the  course  of  dealing  between  England  and  other 
countries,  gold  loses  a  part  of  the  quahty  as  a  quasi-\Qga.\  tender 
for  international  trade,  sometimes  ascribed  to  it  in  current  dis- 
cussion. As  a  commodity,  in  universal  demand  at  some  rate  or 
other,  it  can  always  be  used  in  payment  by  the  debtor  nation,  if 
offered  on  terms  satisfactory  to  the  creditor  nation.  But  payment 
in  gold  cannot  be  required  by  the  latter  so  long  as  there  is,  among 
the  miUions  of  its  population,  any  sufficiently  large  class  of  wants 
demanding  for  their  satisfaction  the  merchandise  exports  or  the 
securities  of  the  debtor  in  preference  to  money.  The  legal  tender 
law  of  the  place  necessarily  regulates  the  mode  of  payment  in 
London,  to  be  observed  by  each  individual  debtor ;  but,  as  has 
already  been  pointed  out,  it  is  no  part  of  that  law,  nor  is  it  a  neces- 
sity of  the  case,  that  the  debtor  should  have  transported  his  means 
of  payment  across  the  Atlantic. 

The  conclusions  reached  by  these  general  considerations  are 
greatly  strengthened,  when  we  apply  to  them  the  test  of  observed 
facts.  England,  France,  and  Germany  are  the  countries  upon 
which  the  United  States  chiefly  draw  for  gold,  and  by  which  the 
United  States  are  most  heavily  drawn  upon,  all  three  success- 
fully maintaining  their  currencies  upon  the  gold  standard.  How, 
then,  do  the  actual  movements  of  gold  into  and  out  of  the 
United  States,  for  a  series  of  years  together,  compare  with  similar 
movements  as  reported  by  the  three  countries  named  .-'  For  the 
purpose  of  this  inquiry  the  nine  calendar  years  from  1882  to  1890 
are  first  taken,  as  making  up  what  can  be  called  a  fairly  normal 
period.  They  begin  after  the  close  of  the  great  influx  of  gold  which 
insured  the  success  of  specie  resumption  by  the  United  States,  and 
they  end  before  the  subsequent  saturation  of  our  currency  with  paper 
and  silver  had  caused  serious  disturbance.  They  include  years  of 
great  prosperity,  and  they  cover  the  period  of  depression  following 
the  financial  crisis  of  1884.  Both  the  products  and  the  imports  of 
gold  by  the  United  States  are  given,  to  show  our  total  receipts  from 


CAN   WE   KEEP   A   GOLD   CURRENCY  ? 


261 


year  to  year ;  and  against  them  are  set  our  annual  gold  exports. 
Annual  imports  and  exports  of  gold  are  also  given  for  each  of  the 
other  countries,  all  being  stated  in  dollars  for  convenient  compar- 
ison. 

[In  dollars,  00,000  omitted.] 


United  States 

England 

France 

Germany 

Prod't 

Imp. 

Exp. 

Imp. 

Exp. 

Imp. 

Exp. 

Imp. 

Exp. 

1882 , 

•      •         32,5 

13,4 

38,7 

70, 

58,5 

54,7 

39,1 

6,8 

9,3^ 

1883 

.      •         3°. 

22,1 

6, 

37,7 

34,5 

12,5 

26,  1 

4,9 

10,  1 

1884 

.      .         30,8 

28, 

40,9 

52,3 

58,5^ 

24,6 

15,8 

4,4 

7,9^ 

1885 

.     .       3i>8 

23,6 

11,4 

61,3 

58,1 

47, 

38,8 

10,1 

6,4 

1886 

•     •       35, 

41,3 

41,3 

63, 

67,1^ 

50,4 

38,2 

11,2 

5,5 

1887 

•     .       33, 

44,9 

9,1 

48,5 

45,4 

18, 

49,8^ 

13,2 

4, 

1888 

•     •       33,2 

II, 

34.5 

76,9 

72,8 

19,5 

37,1^ 

39,9 

23,9 

1889 

.     .       32,8 

12, 

50-9' 

87,2 

70,4 

65,2 

25, 

15,7 

12,5 

1890 

.     .     .       32,8 

20,2 

24.1 

114,8 

69,6 

22,6 

48,3^ 

24,2 

9,9 

Total 

5    .     .     291,9 

216,5 

256,9 

611,7 

534,9 

314,5 

318,1 

130,4 

89,4 

Avera 

ge.     .       32,4 

24, 

28.5 

68, 

59,4 

34,9 

35,4' 

14,5 

9,9 

It  appears  that  during  these  nine  years  the  United  States 
parted,  on  the  average,  with  about  one-half  of  the  gold  received  by 
them  from  the  mines  or  from  abroad,  and  that  England  parted  with 
seven-eighths  of  the  gold  received  by  her.  These  two  countries, 
the  United  States  as  a  mining  country  and  England  as  the  great 
commercial  centre,  acted  as  the  distributers  of  an  immense  addition 
annually  made  to  the  world's  stock  of  money,  each  retaining  its 
own  proportionate  share.  In  this  operation,  each  country  was,  to 
a  great  extent,  a  natural  exporter  of  gold.  Neither,  in  fact,  could 
avoid  exporting  heavily,  so  long  as  its  trade  or  its  mines  brought  in 
a  supply  obviously  so  far  beyond  its  power  of  healthy  absorption. 
Of  the  two,  it  is  important  to  observe,  the  United  States  had  the 
firmer  hold  upon  gold,  so  that  this  country  was  able  to  carry  on  an 
accumulation  which  it  had  begun  to  make  in  the  later  years  of  the 
long  suspension,  and  thus  to  strengthen  steadily  the  specie  basis  of 
its  paper  currency.  The  annual  supply  of  the  United  States  was 
also  the  more  constant,  its  minimum  being  .y8  of  its  average  and  its 

1  Export  exceeds  receipt. 


262 


ESSAYS 


maximum  1.38,  whereas  the  annual  supply  of  England  ranged  more 
widely,  from  .55  to  1.69  of  its  average.  In  the  year  of  strongest 
export  by  the  United  States,  their  ratio  of  export  to  supply  was 
scarcely  higher  than  that  of  England  in  her  strongest  exporting 
year ;  and  there  were  two  years  of  the  nine  in  which  the  United 
States  exported  less  than  .12  of  their  supply,  whereas  in  no  year 
did  England  export  less  than  .60  of  hers.  Finally,  England  shows 
two  years  with  an  excess  of  exports  over  receipts  of  gold,  and  only 
one  is  shown  by  the  United  States. 

As  for  France,  her  imports  and  exports  of  gold  during  these 
nine  years  are  remarkable  for  their  great  amount,  for  their  extreme 
irregularity  from  year  to  year,  and  for  their  close  approach  to 
equality,  taking  the  whole  period  together.  Germany  also  exhibits 
great  irregularity  of  movement,  with  a  constant  accumulation  in 
progress  for  all  but  the  earlier  years,  the  amounts  actually  moved 
being,  for  the  most  part,  of  but  moderate  importance. 

Without  pursuing  further  the  comparisons  suggested  by  this 
table,  it  is  clear  that  during  this  period  the  United  States  were  not 
only  relatively,  but  absolutely,  strong  in  gold,  and  gave  full  proof 
of  ability  to  maintain  their  currency  upon  this  standard,  and  this 
notwithstanding  an  infusion  of  nearly  $300,000,000  of  legal  tender 
silver.  But  the  turning-point  was  reached  by  1890.  The  accumu- 
lated mass  of  silver  coin,  the  issue  of  more  legal  tender  paper  for 
the  purchase  of  a  vast  weight  of  silver  bullion,^  the  gradual  conver- 
sion of  that  bullion  into  standard  dollars,  contemplated  by  the  law 
and  set  in  operation,  the  loss  of  confidence  in  the  stability  of  gold 
payments  by  our  government,  and  our  increasing  discredit  abroad,  — 
all  combined  thenceforward  for  several  years  to  loosen  the  hold  of 
the  United  States  upon  gold.     Violent  financial  revulsion  was  the 

1  The  Secretary  of  the  Treasury  said  to  a  committee  of  the  House  of  Representatives, 
December  i6,  1897  '•  "  I  have  asked  a  gentleman  in  New  York,  .  .  .  who  has  been  Treas- 
urer of  the  United  States,  and  who  has  been  Assistant  Treasurer  in  New  York  for  many 
years,  Mr.  Conrad  N.  Jordan,  about  this.  He  is  in  a  position  where  he  watches  pretty 
closely  the  movements  of  foreign  exchange.  .  .  .  He  says  it  is  the  last  $200,000,000 
which  has  put  us  to  the  blush  all  the  time,  that  has  been  our  trouble.  If  we  get  rid  of 
3200,000,000,  and  get  a  sufficient  gold  reserve,  we  will  not  be  troubled  ;  and  the  country 
will  not  fear  that  we  are  going  to  break."  "  Hearings  and  Arguments  before  the  House 
Committee  on  Banking  and  Currency,"  1897-1898,  p.  23. 

Mr.  Jordan's  $200,000,000  apparently  represented  the  treasury  not^s  of  1890, 
$114,000,000,  and  an  increase  of  silver  certificates  from  July,  1890,  amounting  to  about 
$8fj,ooo,ooo  more. 


CAN   WE   KEEP   A   GOLD   CURRENCY  ? 


263 


inevitable  result;  and,  in  the  eight  calendar  years  from  1891  to 
1898  inclusive,  gold  moved  between  this  country  and  Europe  in 
heavy  surges,  as  shown  in  the  following  table,  compiled  on  the  same 
plan  as  that  already  given  for  the  years  1882- 1890 :  — 

[In  dollars,  00,000  omitted.] 


In  this  table  the  change  wrought  in  every  column  by  the  excep- 
tional year  1898  is  so  marked  that  it  is  worth  while  to  consider  the 
facts  as  they  stood  at  the  close  of  1897,  when  the  footings  were  as 
follows :  — 


United  States 


England 


France 


Germany 


Prod't 

Imp. 

Exp. 

Imp. 

Exp. 

Imp. 

Exp. 

Imp. 

Exp. 

7  years 

298.8 

327.1 

534-4 

949 

761.8 

456.4 

242.9 

313-3 

196.2 

Average    . 

42.7 

46.7 

76.3 

135-6 

108.8 

65.2 

34-7 

44.8 

28 

The  relation  of  the  United  State?  to  the  three  other  commercial 
countries  then  showed  a  remarkable  change  since  the  period  closing 
with  1890.  Instead  of  being  the  greatest  accumulator  of  gold,  this 
country  had  become  the  least,  and  France  held  the  first  place.  In- 
stead of  our  supply  from  all  sources  being  the  most  constant  of  all, 
the  range  between  its  minimum  and  maximum  was  the  greatest; 
and,  in  years  of  greatest  export,  our  ratio  of  export  to  supply  was 
the  highest.     And  yet,  taken  by  itself,  the  exhibit  for  the  United 

^  Export  exceeds  receipt. 


264  ESSAYS 

States  indicated  a  far  greater  power  of  resistance  to  a  continued 
drain  than  might  be  inferred  from  this  comparison  with  other  coun- 
tries. Omitting  1896  and  1897,  when  the  tide  had  turned  again  in 
our  favor,  the  five  years,  1891-1895,  showed  a  total  net  loss  by  the 
United  States  of  scarcely  more  than  $65,000,000;  and,  even  if  we 
add  to  this  the  estimated  amount  of  gold  used  in  the  industrial 
arts,  we  have  an  aggregate  loss  from  our  stock  not  exceeding 
1^142,000,000  in  five  years  of  unexampled  disturbance,  —  a  loss 
more  than  made  up  by  the  returning  current  of  the  next  two  years.^ 
After  all,  in  the  series  of  seven  years  in  which  our  legislation  might 
almost  be  thought  to  be  expressly  designed  to  expel  gold  from  the 
United  States,  our  exports  were  not  quite  seven-eighths  of  our 
receipts  from  imports  and  mines.  In  the  same  years  taken  to- 
gether, England  also  exported  nearly  in  the  same  proportion,  part- 
ing with  four-fifths  of  all  her  receipts. 

Violent  as  the  changes  were  in  these  years,  the  years  of  recov- 
ery came  with  singular  promptness.  In  1891  and  1892  our  exports 
of  gold  were  greater  than  our  receipts ;  and  yet  in  1893  the  return- 
ing current  gave  us  a  favorable  balance  for  the  three  years.  Both 
1894  and  1895  carried  out  a  balance  of  gold,  but  1896  turned  the 
scale  in  our  favor  for  another  three-year  period.  1897  practically 
left  us  in  possession  of  our  own  product,  and  then  came  1898,  with 
such  a  tide  in  our  favor  as  to  completely  distort  the  comparative 
results  of  the  first  seven  years  of  the  period.  Taking  the  average 
for  the  eight  years,  1891  to  1898,  the  United  States  again  appear 
as  the  greatest  accumulator  of  gold,  parting  with  less  than  two- 
thirds  of  their  gold  receipts,  whereas  England  in  the  same  years 
parted  with  more  than  four-fifths  of  hers. 

How  large  the  accumulated  stock  of  gold  in  the  Treasury,  in  the 
banks,  and  in  the  hands  of  the  public,  has  become  in  the  twenty 
years  since  specie  payment  was  resumed,  is  a  question  as  to  which 
the  Treasury  estimates  may  at  least  give  us  an  approximation. 
Starting  with  an  estimate  of  about  $213,000,000  in   June,    1878, 

^  The  Treasury  estimate  of  the  stock  of  gold  coin  and  bullion  in  the  United  States 
gives  the  following  sums  :  — 

December  31,  1890 $704,100,811 

December  31,  1895 597,927,254 

December  31,   1897 752,316,476 

Rep07-t  of  the  Treasurer  for  1898,  p.  IIO. 


CAN  WE  KEEP  A  GOLD  CURRENCY?         265 

and  following  month  by  month,  with  great  minuteness,  the  coin- 
age and  the  movements  of  American  coin  in  and  out,  the  statis- 
ticians of  the  Treasury  gave  us  in  the  latter  part  of  1881  a  stock 
of  over  $500,000,000,  and,  with  occasional  relapses,  brought  the 
estimates  to  $700,000,000  by  1888,  and  to  $900,000,000  by  October, 
1898.  The  sums  are  vast,  and  it  has  never  been  easy  to  account 
for  the  great  amounts  which  must  be  supposed  to  exist  outside  of 
the  visible  depositories.  Still,  the  figures,  when  checked  by  the 
operations  of  the  mint  and  by  the  annual  product  and  movement 
in  foreign  trade,  conform  sufficiently  well  to  the  rough  probabilities 
of  the  case.  They  give  a  solid  assurance  that,  as  a  support  for 
our  monetary  system,  we  have  a  stock  of  gold  sufficient,  and  suffi- 
ciently nourished  by  the  resources  of  mining  and  commerce,  to  meet 
the  needs  of  a  great  and  growing  nation.  Actual  or  probable  inad- 
equacy of  supply  cannot  be  alleged  as  a  condition  operating  to  our 
injury. 

This,  then,  is  the  state  of  the  facts.  Our  gold  is  at  times 
drawn  from  us  in  considerable  amounts,  which,  however,  bear  but 
a  low  ratio  to  our  total  stock,  and  are  drawn  away  in  no  small 
measure  by  the  aid  of  our  own  improvident  legislation.  The 
recovery  comes  with  no  great  delay,  and  with  extraordinary  com- 
pleteness, as  the  result  of  economic  advantages  of  which  imprudent 
policy  may  impair,  but  cannot  destroy,  the  value.  No  reverse  is 
strong  enough  to  wrest  our  gold  currency  from  us.  And  yet, 
judging  from  the  past,  two  or  three  years  may  be  enough  to  carry 
us  from  our  present  extreme  of  confidence  to  the  same  dread  that 
the  foundation  is  slipping  from  under  us,  that  mastered  the  public 
mind  in  1893  and  1896.  We  have  the  material  to  build  a  system 
as  solid  and  as  calmly  enduring  as  that  of  England,  but  our  failure 
for  twenty  years  to  bring  into  order  our  piecemeal  legislation 
on  this  subject  has  cost  hundreds  of  millions  in  shattered  enter- 
prises and  stagnant  industry.  The  foolish  boast  which  some  of 
our  public  men  were  fond  of  making  a  few  years  ago,  that  our 
currency  system  is  the  best  ever  known,  and  indeed  perhaps 
perfect,  is  not  current  at  present.  In  fact,  there  are  not  many 
who  do  not  condemn  the  system  for  one  reason  or  another.  Still 
there  is  a  perilous  delay  in  the  work  of  reform. 


THE   CRISIS   OF    1857I 

Contemporary  explanation  of  the  revulsion  of  1857  assigned  a 
leading  place  to  the  course  of  our  foreign  trade  and  directed  atten- 
tion to  the  rapid  increase  of  our  importations  and  to  the  heavy 
exports  of  coin  and  bullion,  made,  it  was  said,  to  pay  for  imported 
luxuries  purchased  under  the  stimulus  of  habitual  extravagance. 
A  more  careful  examination  of  the  facts,  however,  does  not  sup- 
port the  conclusion  that  during  the  years  from  1850,  when  the 
marked  increase  of  foreign  trade  began,  to  the  summer  of  1857, 
the  people  of  the  United  States  had  purchased  beyond  their  means. 
It  is  true  that  in  the  seven  years,  1850-1856,  imports  for  domes- 
tic consumption  had  doubled,  the  average  at  the  beginning  of  the 
period  being  about  ^150,000,000,  and  the  amount  for  one  of  its 
last  years  rising  to  nearly  ^300,000,000.  But  leaving  out  of  view 
the  effect  produced  upon  the  valuation  by  the  depreciation  of  gold 
then  in  progress,  owing  to  the  immense  product  then  coming 
forward  from  California  and  Australia,  this  increase  of  foreign 
purchases  was  the  natural  result  of  a  rapidly  increasing  ability  to 
pay,  caused  by  an  unexampled  development  of  domestic  resources 
and  domestic  industry  and  by  the  growth  of  the  country  in  popu- 
lation. This  was  reflected  in  a  greater  volume  of  exports  of  mer- 
chandise, which  increased  from  an  average  of  about  ^132,000,000 
at  the  beginning  to  $217,000,000  in  the  year  1854.  In  the  year 
1856  net  imports,  i.e.  for  home  consumption,  rose  to  $295,000,000, 
but  in  the  same  year  exports  of  merchandise  increased  in  a  much 
higher  ratio  in  consequence  of  an  unprecedented  export  of  bread- 
stuffs  ;  and  even  in  the  year  ending  with  June,  1857,  when  net  im- 

1  This  and  the  following  paper  on  the  crisis  of  i860  were  clearly  not  intended  by  the 
author  for  publication.  With  some  omissions  they  are  the  substance  of  a  series  of  lectures 
prepared  about  1875,  which,  though  it  was  not  his  custom,  were  completely  written 
out.  They  present  so  clear  and  comprehensive  a  narrative  of  an  important  period  in  our 
economic  history  that  it  has  seemed  fitting  to  include  them  in  the  present  volume. 

266 


THE   CRISIS   OF    1857  267 

ports  rose  to  1^333,000,000,  the  highest  point  they  had  ever  reached, 
exports  of  merchandise  in  Hke  manner  rose  to  over  $278,000,000. 

This  enormous  increase  in  the  ability  of  the  country  to  satisfy 
its  demand  for  foreign  productions  by  the  sale  of  its  own  great 
staples  of  trade  still  left  an  annual  balance,  small  at  the  beginning 
of  the  period,  but  rising  at  the  close  in  some  years  to  the  neighbor- 
hood of  $70,000,000,  to  be  liquidated  in  some  other  way.  The  sum 
of  these  annual  balances  for  the  period  1850-185 5  amounted  to 
nearly  $221,000,000,  and  to  cover  this  amount  there  was  an  addi- 
tional export  of  coin  and  bullion  amounting  to  nearly  $205,000,000. 
It  is  no  doubt  this  visible  flow  of  the  precious  metals  which,  at  the 
time  and  since,  gave  tht  impression  of  a  vastly  overdone  foreign 
trade,  draining  our  resources  and  leading  us  to  some  inevitable 
catastrophe.  But  there  is  plainly  nothing  in  the  export  of  the  pre- 
cious metals  which  should  confirm  this  impression  if  fairly  con- 
sidered. The  productive  mines  of  California  had  made  gold  one 
of  our  regular  staples  of  commerce,  for  which  we  must  seek  an 
outlet,  as  for  cotton  or  for  corn,  and  which  would  as  certainly 
depreciate  if  it  were  entirely  retained  in  the  country.  From  the 
year  1849,  then,  gold  became  one  of  our  ordinary  articles  of  export, 
and  formed  a  large  part  in  the  immense  increase  of  purchasing 
power  which  led  to  the  rapid  growth  of  our  imports.  Nor  had  this 
steady  sale  of  a  constantly  accruing  surplus  stock  of  gold  left  the 
people  of  the  United  States  scantily  supplied,  since  it  appears  that 
there  was  a  steady  increase  of  the  stock  held  in  this  country, 
roughly  estimated  for  the  entire  period  at  $140,000,000. 

1 849-1 857.     American  gold  received  at  the  mint  of 

the  United  States  .         .         .     $402,000,000 

1 849-1 857.     Specie  and  bullion  imported  .         .         50,000,000 

$452,000,000 
1849-1857.     Deduct  amount  exported       .         .         .       312,000,000 

Added  to  the  stocl<      ....     $140,000,000 

Reckoning  gold  then  as  a  domestic  product  and  a  legitimate 
and  profitable  subject  of  exchange  with  other  nations  for  their 
products,  our  total  exports  for  the  years  1850-1855  fell  short  of  our 
imports  by  only  $77,000,000;  in  the  year  1856  there  was  a  balance 
of  over  $12,000,000  in  our  favor,  and  in  the  year  ending  with  June, 


268  ESSAYS 

1857,  a  balance  of  but  52,000,000  against  us  ;  so  that  from  1850 
down  to  the  beginning  of  the  crisis  there  was  an  unfavorable 
balance,  according  to  the  usual  way  of  estimating  the  balance  of 
trade  for  the  whole  period,  of  only  $67,000,000. 

In  connection  with  this  comparatively  moderate  sum,  we  must 
take  into  account  some  things  which  enter  into  the  real  balance 
of  trade,  which  do  not  appear  in  the  custom-house  returns.  The 
tonnage  of  the  United  States  increased  by  forty  per  cent  during  the 
years  18 50-1 85  5,  and  of  the  immense  foreign  trade  which  had  grown 
up,  by  far  the  larger  part  was  carried  on  by  American  ships  and 
with  American  capital.  In  some  years  ^e  trade  in  foreign  ships 
was  not  much  above  one-fifth  ;  even  in  our  trade  with  England 
two-thirds  of  the  freight  was  earned  by  American  ships,  and  it  was 
only  in  our  trade  with  Canada  that  any  considerable  amount  of 
freighting  was  so  divided  as  to  give  to  foreign  tonnage  an  approach 
to  equality  of  employment.  The  freights  earned  by  American 
ships,  therefore,  and  the  profit  on  a  large  share  of  foreign  trade 
carried  on  with  American  capital,  must  be  included  as  an  impor- 
tant addition  to  the  purchasing  power  of  the  country.  It  must 
also  be  remembered  that  considerable  amounts  of  capital  had  been 
borrowed  from  abroad  for  purposes  of  internal  improvements, 
especially  for  the  building  of  railroads,  and  that  this  capital,  pass- 
ing through  the  usual  channels  of  exchange,  would  tend  to  pro- 
duce a  temporary  preponderance  of  imports.  Making  allowance, 
on  the  other  hand,  for  the  probable  undervaluation  of  imports 
under  the  purely  ad  valorem  system  of  the  tariff  of  1846,  which 
would  make  the  real  balance  against  the  United  States  larger  than 
that  shown  by  the  custom-house  returns,  it  seems  certain  that  the 
apparent  balance  against  the  United  States  for  the  period  1850-1857 
is  fully  offset  by  freights  and  profits,  and  that  therefore  the  for- 
eign trade  of  that  period,  although  large,  was  not  beyond  the 
means  of  the  country.  Its  rapidity  of  increase,  which  was  also 
thought  by  many  to  be  alarming,  was  due  to  the  addition  of  gold  to 
our  list  of  exports,  to  the  immense  extension  of  cotton  growing  with 
an  ever  widening  market,  to  the  fresh  impulse  lately  given  to  indus- 
trial interests  in  all  parts  of  the  world  by  the  gold  discoveries,  and, 
more  than  all,  to  the  rapid  increase  of  the  United  States  in  popu- 
lation, and  hence  in  productive  power. 

In  conclusion  it  may  be  observed  that  the  increase  of  our  for- 


THE   CRISIS   OF    1857  269 

eign  trade  was  compatible  with  either  safe  or  unsound  develop- 
ment of  the  country,  and  in  itself  affords  no  clear  indication  of  the 
condition  of  affairs.  If  the  countries  which  purchased  the  bulk  of 
our  exports  were  advancing  along  unhealthy  lines,  then  our  pro- 
ducers for  those  markets  were  engaged  in  occupations  subject  to 
serious  check  at  any  moment.  Similarly,  if  our  own  domestic 
development  was  in  large  measure  unsound,  the  increased  pur- 
chasing power  of  the  people,  which  was  reflected  in  greater  imports, 
was  certain  sooner  or  later  to  be  seriously  diminished. 

While  for  these  reasons  we  may  fairly  doubt  the  commonly 
received  statement  that  in  the  years  from  1850  to  1857  the  foreign 
imports  of  the  country  had  risen  to  a  dangerous  point,  it  is 
beyond  question  that  in  other  respects  business  affairs  exhibited  an 
unhealthy  expansion,  which  fully  accounts  for  the  state  of  things 
which  followed.  Aside  from  all  stimulating  influences  of  a  special 
and  local  character,  the  people  of  the  United  States  felt  the  im- 
pulse given  both  to  production  and  to  speculation  in  all  parts  of 
the  world  by  the  progressive  depreciation  of  gold.  The  general 
rise  in  prices  was  a  new  spur  to  enterprise  and  a  new  incentive  to 
the  anticipation  of  gains  likely  to  accrue  in  the  future.  In  spite 
of  the  partial  revulsion  of  1854  and  1855,  nearly  every  branch  of 
domestic  business  was  driven  to  the  extreme  point  to  which  the 
competition  of  a  singularly  active  and  pushing  class  of  men  could 
force  it,  and  this  process  was  accompanied  by  an  extension  of  mer- 
cantile credits  in  length  as  well  as  in  amount.  For  more  than  a 
generation  the  temptation  to  this  kind  of  expansion  had  been  almost 
constantly  present  in  the  United  States,  especially  in  all  branches  of 
business  connected,  even  remotely,  with  the  supply  of  commodities 
in  the  South  and  West,  —  regions  poorly  supplied  with  capital,  in 
which,  either  from  the  prevailing  habits  of  the  people  or  from  the 
necessities  of  a  rapid  development,  the  crop  of  the  year  was  apt  to  be 
heavily  mortgaged  for  the  expenses  of  its  production.  The  credits 
given  to  Southern  and  Western  buyers  were  necessarily  long  at  any 
time,  and  there  is  ample  evidence  that  in  the  few  years  before  1857 
they  had  seriously  increased,  and  that  the  lengthening  of  the  credit 
given  to  the  consumer  had  brought  in  its  train  a  longer  credit  given  to 
the  merchant  who  supplied  him,  a  longer  credit  by  the  jobber  to  the 
merchant,  and  by  the  manufacturer  or  commission  merchant  to  the 
jobber,  and  so  on  through  the  whole  chain  of  intermediate  dealers 


270  ESSAYS 

from  the  consumer  to  the  producer  or  importer.  The  terms  of 
credit  given  varied  with  the  branch  of  trade,  but  in  all  the  ten- 
dency to  longer  time  was  strong. 

This  vast  mass  of  credit  was  managed  by  means  of  upwards  of 
fourteen  hundred  banks,  with  an  aggregate  capital  of  $371,000,- 
000,  estabUshed  under  the  laws  of  the  several  states  and  therefore 
acting  under  no  general  superintendence  or  control.  The  systems 
of  legislation  on  this  subject,  adopted  by  the  states,  often  differed 
from  each  other  radically,  and  were  in  many  cases  inadequate  and 
even  of  questionable  soundness ;  but  nevertheless,  the  entire  paper 
currency  of  the  country  for  many  years  had  been  furnished  by 
these  banks.  Gold  was  the  only  legal  tender  (except  for  sums 
under  $s),  and  was  also  the  currency  of  the  government,  since  the 
Treasury  of  the  United  States,  under  the  Independent  Treasury 
law  of  1846,  was  not  permitted  either  to  receive  or  to  pay  except 
in  coin.  For  the  purpose  of  everyday  life  gold  was  little  used  by 
the  people  except  in  the  Southwest  and  on  the  Pacific  coast ;  the 
silver  coinage,  debased  and  limited  in  amount  under  the  act  of 
1853,  supplied  the  small  change,  and  bank-notes  were  the  ordi- 
nary currency  throughout  the  greater  part  of  the  country.  The 
safety  and  currency  of  these  notes  varied  as  materially  as  the  sys- 
tems on  which  the  banks  were  established.  The  New  England 
banks  had  entered  into  a  voluntary  combination  to  secure  the  daily 
redemption  of  their  circulation,  and  this,  together  with  the  general 
soundness  of  their  assets,  maintained  their  notes  in  good  credit. 
The  greater  number  of  the  New  York  banks  were  established 
under  a  general  law  which  required  a  deposit  of  public  stocks  with 
the  state  government  as  security  for  the  redemption  of  their  cir- 
culation. But  this  provision  for  ultimate  payment  did  not  answer 
the  same  purpose  as  the  New  England  system  of  securing  the 
immediate  convertibility  of  the  circulation,  and  it  was  accordingly 
only  by  the  voluntary  adoption  of  a  similar  system  that  the  New 
York  banks  secured  for  their  currency  full  confidence.  In  some 
of  the  Middle  states,  and  in  a  large  part  of  the  West,  the  New  York 
system  of  a  secured  circulation  had  been  adopted,  but  vfhh  great 
looseness  of  detail,  and  currency  had  been  poured  out  based  upon 
stocks  of  uncertain  value  and  without  provision  for  its  prompt  re- 
demption. In  the  South,  three  states,  Florida,  Arkansas,  and  Texas, 
forbade  the  establishment  of  banks  within  their  limits,  others  had 


THE   CRISIS   OF   1857 


271 


followed  the  New  York  system,  while  Louisiana,  availing  herself 
of  the  pecuhar  course  of  Southwestern  trade  which  then  made 
New  Orleans  a  natural  entrepot  for  specie,  had  established  her 
banks  on  a  more  solid  foundation  of  coin  than  any  others  in  the 
United  States. 

The  loans  of  these  banks  had  been  rapidly  extended  during 
the  years  1855  and  1856,  except  in  the  Eastern  states,  where  the 
increase  had  been  moderate,  and  in  the  aggregate  had  risen  at 
the  beginning  of  1857  to  $684,000,000,  an  increase  of  nearly 
twenty  per  cent.  Their  deposits  had  increased  in  similar 
ratio,  and  amounted  to  $230,000,000  ;  while  their  circulation,  in- 
creasing more  slowly,  amounted  to  $214,000,000.  Against  this 
immediate  liability  for  deposits  and  circulation,  amounting  to 
$445,000,000,  the  banks  held  an  aggregate  of  $58,000,000  in 
specie,  divided  very  unequally  between  the  different  sections.^ 
Specie  holdings  were  but  thirteen  per  cent  of  demand  liabihties, 
contrasting  with  nineteen  per  cent  in  1855.  The  proportion  of 
J  specie,  however,  was  not  the  measure  of  the  confidence  which  the 
public  felt  in  the  banks  of  the  several  sections,  for  the  notes 
of  the  Eastern  banks  which  were  most  poorly  provided  with  coin 
enjoyed  a  wide  circulation  in  the  other  sections,  while  those  of  a 
large  part  of  the  banks  of  the  Middle  and  Western  states  had 
only  a  local  circulation.  And  of  the  whole  mass  of  paper  cur- 
rency, we  may  fairly  say  that  it  was  for  the  time,  and  so  long  as  no 
reverse  occurred,  practically  convertible,  and  really  at  a  par  with 
specie  when  not  too  far  removed  from  the  place  of  issue,  but  that 
the  banks  were  nowhere,  except  in  Louisiana,  in  a  condition  to 
resist  a  long-continued  demand  for  specie.  The  paper  currency 
was  then  eminently  a  currency  resting  upon  credit  and  represented, 


1  The  following  table,  from  data  collected  by  the  Treasury  Department,  shows  ap- 
proximately the  condition  of  the  banks  in  January,  1857  :  — 


States 

Specie 

Circulation 

Deposits 

Percentage  of 
Liabilities  in  Specie 

Eastern      .     . 

^7,000,000 

^53,000,000 

^35,000,000 

.o8i 

Middle      .     . 

23,000,000 

62,000,000 

140,000,000 

.11^ 

Southern    .     . 

7,000,000 

39,000,000 

15,000,000 

.13 

Southwestern . 

16,000,000 

38,000,000 

26,000,000 

•24t^ 

Western     .     . 

.     .          5,000,000 

22,000,000 

14,000,000 

.13 

158,000,000      ^214,000,000      ^230,000,000 


.i3iV 


2/2  ESSAYS 

not  so  much  money,  as  the  beheved  ability  of  the  banks  to  ulti* 
mately  pay  money  if  required.^ 

•  The  general  tendency  to  expansion  by  means  of  credit  had 
shown  itself  also  in  a  marked  degree  in  the  development  of  the 
railway  system  of  the  United  States.  At  the  beginning  of  the 
year  1850  the  number  of  miles  of  railway  in  the  United  States 
was  but  7355.  Under  the  pressure  of  urgent  need  of  improved 
means  of  transportation  and  the  general  stimulus  to  all  enterprises 
already  referred  to,  the  extension  of  the  roads  into  districts  not  yet 
provided  and  not  even  settled,  was  undertaken  on  a  great  scale, 
and  in  January,  1857,  the  mileage  had  increased  to  24,476  miles. 
That  a  large  part  of  this  increase  was  in  anticipation  of  the  actual 
wants  of  the  country,  and  to  a  considerable  degree  of  a  speculative 
character,  might  be  inferred  from  the  fact  that  of  the  3400  miles 
built  in  the  year  1856,  nearly  one-half  were  in  the  seven  sparsely 
inhabited  Northwestern  states,  even  if  the  notorious  embarrass- 
ments of  many  of  the  newer  roads  had  not  made  the  fact  certain. 
To  this  rapid  investment  of  capital  in  a  form  in  which  its  returns 
must  be  slow  and  uncertain,  the  policy  of  Congress  in  making 
liberal  grants  of  public  lands  in  aid  of  new  railways  had  given  no 
small  encouragement.  It  is  estimated  that  by  acts  of  Congress 
from  1850  to  August,  1856,  upwards  of  20,000,000  acres  of  lands 
were  granted  as  subsidies  for  the  opening  of  new  lines  in  the  West 
and  South.  That  the  assistance  thus  given  to  the  extension  of 
railways  in  advance  of  population  has  quickened  the  growth  of 
the  states  interested  and  has  caused  an  immense  and  general  in- 
crease of  wealth,  is  beyond  any  serious  question  ;  but  its  immediate 
effect  was  to  encourage  hazardous  undertakings,  to  lead  to  the  pro- 
jection and  opening  of  many  lines  of  which  the  chief  purpose  was 
to  secure  the  land  grants  for  the  projector,  and  to  foster  specu- 
lation in  lands.  To  what  a  height  this  last  form  of  speculation 
had  run  is  apparent  from  the  sudden  increase  in  the  receipts  of 

^  We  have  then  the  following  elements  entering  into  the  composition  of  the  currency 
of  the  United  States  at  the  beginning  of  1857  :  — 

Bank-notes ^214,778,822 

Bank  deposits 230,351,352 

Specie  in  the  Treasury    .....  22,751,476 

Specie  in  the  banks 58,349,838 

Specie  in  circulation  (estimated)    .         .        .  160,000,000 


THE    CRISIS   OF   1857  273 

the  Treasury  from  the  sale  of  lands,  from  an  average  of  little  over 
;^2, 000,000  a  year  to  nearly  $11,500,000  in  the  year  1854-1855,  and 
nearly  $9,000,000  in  185 5-1 856.  The  railroads  had  been  built,  more- 
over, and  lands  bought,  to  a  great  extent,  not  by  the  use  of  funjis 
belonging  to  the  projectors  and  speculators,  but  by  a  lavish  use  of 
credit  in  the  shape  of  mortgage  bonds  which  offered  a  form  of  in- 
vestment attractive  in  all  respects  save  in  security  for  regular 
returns.  A  chill  came  over  these  enterprises  several  months 
before  the  close  of  1856,  and  declining  prices  marked  the  general 
diminution  of  public  confidence.  Some  companies  hitherto  in  good 
credit  found  their  returns  insufficient  for  the  payment  of  their 
interest,  the  impression  gained  ground  that  the  calculations  on 
which  most  of  the  new  railroad  enterprises  were  founded  were 
extravagant;  and  finally,  when,  under  a  domestic  pressure  for 
money,  and  a  sudden  rise  of  the  rate  of  discount  at  the  Bank  of 
England,  the  prices  of  stocks  underwent  a  sharp  decline  in  Sep- 
tember and  October,  1856,  the  markets  in  New  York  exhibited 
some  of  the  symptoms  of  panic.  Returning  ease  in  affairs  par- 
tially restored  confidence  for  the  time,  but  the  buoyancy  of  rail- 
road securities  and  land  operations  was  lost,  and  to  engage  capital 
for  any  fresh  enterprise  had  become  a  matter  of  serious  difficulty. 
The  consequences,  however,  had  still  to  be  met  of  the  investment 
of  an  average  of  $60,000,000  a  year  in  fixed  capital  in  railroads, 
and  of  vast  additional  amounts  required  to  complete  construction 
already  entered  upon  and  to  fund  floating  indebtedness.  No  small 
part  of  the  bonds  by  which  these  debts  were  represented  now  de- 
pended largely  upon  the  credit  of  individuals,  and  not  upon  their 
own  real  solidity,  for  the  estimation  which  they  still  enjoyed  in 
the  markets,  and  thus  added  in  no  small  degree  to  the  increase  of 
that  general  system  of  mutually  dependent  credit,  in  which  the 
fall  of  a  part  may  cause  the  fall  of  the  whole  fabric. 

This,  then,  was  in  general  the  condition  of  the  United  States  at 
the  beginning  of  the  year  1857  :  — the  foreign  trade  of  the  country, 
which  for  some  years  had  rapidly  increased,  but,  as  is  probable, 
without  being  overdone,  was  stimulated  to  a  high  degree  of  activity. 
Internal  trade  had  been  pushed  forward  with  a  great  expansion  and 
lengthening  of  credits ;  the  railroad  system  in  its  rapid  growth  had 
absorbed  much  circulating  capital  and  had  also  contributed  a  large 
share  toward  the  increase  of  the  vast  system  of  credit  on  which 


274  ESSAYS 

our  domestic  affairs  rested.  And  finally,  this  mass  of  credit  was 
managed  by  the  aid  of  a  great  number  of  banks  established  upon 
unlike  and  often  insecure  systems,  acting  upon  no  common  princi- 
ple, and  with  no  important  guaranty  for  the  faithful  and  prudent 
discharge  of  their  functions. 

In  Europe  the  state  of  things  was  in  few  respects  different  from 
that  seen  here,  and  it  may  be  said  that  throughout  the  commercial 
world  the  materials  for  a  crisis  were  prepared  and  the  consumma- 
tion fast  approaching.  It  is  too  much  to  say  that  in  such  a  state 
of  affairs  an  explosion  is  inevitable,  for  a  crisis  may  be  reached 
and  passed  without  panic,  and  be  followed  by  stagnation  instead 
of  revulsion.  But  it  is  important  to  observe  that  the  circumstances 
were  such  that  whatever  should  produce  an  explosion  in  one  country 
might  easily  lead  to  a  general  crash.  Speculations  may  be  local 
in  their  character,  but  the  credit  of  merchants  and  bankers  is  a 
comphcated  bond  uniting  nations  too  closely  to  allow  any  one  to 
escape  from  its  share  of  the  burden  which  disaster  brings  upon 
any  other. 

At  the  beginning  of  the  year  1857  the  tone  of  general  business 
in  the  United  States  was  much  less  animated  than  it  had  been 
some  months  before.  The  year  opened  with  but  a  moderately 
good  domestic  trade,  some  pressure  for  money  being  felt  in  all 
parts  of  the  country,  and  it  seems  probable  that  some  reaction  had 
even  then  begun  to  be  felt  among  consumers.  The  mercantile 
community,  however,  still  had  great  confidence  in  the  future,  based 
on  the  knowledge  that  the  crop  of  cotton  then  gathered,  though 
smaller  than  that  of  the  preceding  year,  was  in  quick  demand 
abroad  at  advancing  rates  ;  that  the  foreign  demand  for  breadstuffs 
and  provisions  was  large,  and  that  in  spite  of  an  immense  harvest, 
prices  were  firmly  maintained  ;  while  tobacco,  then  one  of  our  chief 
articles  of  export,  was  higher  than  it  had  been  for  several  years, 
and  in  strong  demand.  The  importations  made  near  the  close  of 
the  preceding  year  had  shown  some  falling  off,  and  under  these 
circumstances  foreign  exchange  had  suffered  a  little  decline,  show- 
ing that  the  real  balance  of  trade  at  the  opening  of  the  year  was 
on  the  whole  inclining  in  favor  of  the  United  States.  Shipments 
of  gold  continued,  as  was  inevitable  after  the  extraordinary  impor- 
tation for  the  fall  trade  of  1856,  but  not  at  any  unusual  rate.     In 


THE   CRISIS   OF    1857  275 

this  state  of  things  importers  felt  encouraged  to  increase  their 
imports  for  the  spring  trade  beyond  any  previous  example. 

The  spring  trade,  however,  did  not  meet  the  expectation  which 
had  been  formed.  The  money  market  remained  close  in  all  parts 
of  the  country,  and  merchants  everywhere  found  their  collections 
slow.  Especially  was  this  the  case  in  the  West,  where  the  chronic 
deficiency  of  floating  capital  felt  in  that  swiftly  developing  region 
had  been  aggravated  by  the  collapse  of  land  speculation  and  by  the 
absorption  of  capital  in  railroad  enterprises.  The  sales  of  the  spring, 
therefore,  were  unsatisfactory,  and  importers  found  it  necessary 
to  force  off  their  merchandise  by  auction  to  an  unusual  extent,  and 
with  heavy  loss.  Large  stocks  were  also  held  over  in  bond  by 
those  who  deemed  themselves  in  position  to  do  so,  in  the  hope  of 
an  improved  demand  for  the  fall  trade.  It  should  be  observed 
also  that  the  heavy  importations  which  were  pressing  upon  the 
market  at  this  time  were  largely  swollen  by  a  speculative  move- 
ment in  sugar,  caused  by  the  almost  complete  failure  of  the  crop 
in  Louisiana  in  1856.  This  cause  led  to  an  immense  increase  of 
imports  of  sugar  from  an  average  of  about  1^13,000,000  per  annum, 
to  nearly  ^42,000,000  in  the  year  ending  with  June,  1857,  so  that 
on  the  latter  date  it  was  estimated  that  nearly  70,000  tons  were  held 
in  New  York  alone,  and  at  high  prices,  in  the  expectation  of  a  still 
further  advance.  The  effort  required  to  carry  this  enormous  stock 
in  a  market  where  existing  business  conditions  were  tending  to  lock 
up  a  large  amount  of  capital  in  unsalable  imports,  was  evidently  a 
considerable  aggravation  of  the  situation. 

The  state  of  affairs  which  can  be  so  clearly  traced  in  the  move- 
ments of  the  import  trade,  also  made  itself  felt  in  most  depart- 
ments of  domestic  business.  There  was  everywhere  what  may 
be  called  a  premonitory  chill,  and  some  exhibition  of  uncertainty, 
if  not  of  doubt,  respecting  the  future,  —  the  unfailing  symptoms 
that  although  prices  might  often  be  maintained  in  many  branches 
of  business,  speculation  had  reached  its  limit.  It  appears  from 
the  periodicals  of  the  day  that  early  in  the  year  fears  began  to  be 
expressed  here  and  there  that  a  crisis  was  approaching.  Predic- 
tions of  this  sort,  however,  are  unpopular,  and  are  apt  to  be 
timidly  expressed,  except  by  those  whose  habitual  fondness  for 
the  dark  side  of  things  deprives  their  foresight  of  all  current 
value,  and  the  mercantile  world,  in  its  calculations  as  to  possible 


2^6  ESSAYS 

disaster,  is  generally  ready  to  give  more  weight  to  the  chances 
of  escape  than  to  the  chances  of  failure.  It  would  seem,  how- 
ever, that  the  banks  of  the  city  of  New  York  were  sensible,  as 
early  as  February,  that  the  condition  of  affairs  was  unsafe,  and 
that  the  expansion  of  their  liabilities  had  gone  too  far,  for  in  three 
weeks  after  the  7th  of  February,  when  their  loans  stood  at  $112- 
876,000,  the  highest  point  then  known,  they  contracted  them  to 
$111,137,000  at  the  season  when  an  increase  instead  of  a  contrac- 
tion was  usual.  Deposits  which  had  for  some  time  been  irregular 
fell  off  by  about  $4,000,000,  but  in  the  first  week  in  March  the 
contraction  was  abandoned,  and  the  expansion  resumed.  With 
the  exception  of  a  short  reaction  in  April,  the  increase  of  loans 
then  went  on  with  tolerable  regularity  until  the  8th  of  August, 
when  they  reached  the  extreme  point  for  the  year,  and  stood 
at  $122,077,000.  Although  a  large  part  of  this  expansion  was 
offset  by  the  creation  of  new  bank  capital,  its  effect  in  encour- 
aging dependence  on  an  already  over-stimulated  credit  is  mani- 
fest. It  is  important  to  observe,  however,  that  so  far  as  their 
own  position  was  concerned,  the  banks  of  New  York  had  gained 
a  little  in  strength  since  the  beginning  of  the  year.  Comparing 
their  returns  in  January  with  those  for  the  last  half  of  July  and 
the  first  half  of  August,  it  appears  that  in  the  former  month  they 
held  an  average  of  eleven  and  one-half  per  cent  of  their  liabilities 
in  specie,  and  in  the  latter  an  average  of  twelve  and  one-half. 
This  was  a  narrow  basis  for  a  business  so  vast  as  that  indicated 
by  the  point  reached  by  their  loans,  and  shows  that  whatever 
caution  their  position  in  August  required  was  equally  needed  in 
January. 

The  banks  of  the  city  of  New  York  began  at  this  point  to  feel 
severely  the  effects  of  a  practice  which  has  more  than  once  led 
them  into  difficulty.  They  had  for  a  long  time  been  in  the  habit 
of  inviting  the  deposit  of  large  balances,  especially  by  the  country 
banks,  by  paying  interest  for  such  deposits.  Such  transactions 
enabled  the  country  banks  to  earn  an  interest  of  perhaps  four 
per  cent  on  sums  which  might  otherwise  be  unemployed,  while 
the  city  banks,  obtaining  funds  at  this  moderate  rate,  were  able 
to  increase  their  loans  to  several  times  the  amount  of  the  cash 
thus  secured.  But  as  the  country  banks  were  subject  to  demands 
from  their  own  depositors,  it  was  necessary  for  them  to  reserve 


THE   CRISIS   OF   1857  277 

the  right  of  calHng  upon  the  city  banks  for  their  balances  at  any 
moment,  and  there  was  thus  an  amount  of  liabilities,  variously  esti- 
mated at  from  ^8,000,000  to  ^i  5,000,000,  which  an  unfavorable  turn 
of  affairs  might  at  any  time  cause  to  be  drawn  from  the  city.  In 
order  to  be  in  a  position  to  meet  such  withdrawals,  the  city  banks 
had  fallen  into  the  habit  of  making  large  loans  upon  call  with 
collateral  security.  Early  in  August,  when  the  bank  loans  had 
reached  their  height,  the  dangers  of  this  part  of  the  system  had 
begun  to  develop  themselves.  The  serious  fall  which  had  already  oc- 
curred in  the  prices  of  railroad  securities,  which  it  would  seem  were 
a  favorite  form  of  collateral,  had  made  it  necessary  to  insist  upon 
a  larger  margin  of  security  above  the  amount  lent,  and  it  began 
to  be  felt  that  the  curtailment  of  loans  of  this  kind  would  be 
attended  with  some  difficulty.  It  needed  then  only  a  strong  de- 
mand by  the  country  banks  to  cause  a  pressure  by  the  city  banks 
upon  those  who  had  borrowed  from  them  upon  call,  and  in  the 
necessary  tightening  of  the  money  market  a  similar  pressure  upon 
the  regular  borrowers  on  commercial  paper. 

Reviewing  the  condition  of  affairs  at  the  beginning  of  August, 
we  find  that  although  the  money  market  in  the  cities  had  even 
shown  some  temporary  ease  from  the  large  payments  of  dividends 
and  interest  on  public  and  corporate  securities  in  July,  it  had  some 
disquieting  symptoms.  There  was  as  usual  at  this  season  a  distinct 
rise  in  the  rates  for  foreign  exchange,  not  caused,  however,  by  any 
special  demand  for  money  abroad,  for  the  Bank  of  England  was 
able  even  to  lower  its  rate  of  discount  in  July,  but  the  effect  of  the 
heavy  importations  made  in  the  past  few  months,  which  had  added 
nearly  1^30,000,000  to  the  amount  of  goods  ordinarily  in  the 
government  warehouses.  Under  this  rise  in  exchange  the  exporta- 
tion of  specie  began  to  increase,  with  the  prospect  of  a  serious 
drain,  from  which  Httle  relief  was  to  be  expected  in  an  increase  of 
domestic  exports,  since  the  favorable  harvests  in  Western  Europe 
promised  but  a  light  demand  for  breadstuffs,  while  it  was  still 
early  for  the  exports  of  cotton  and  tobacco.  This  unfavorable 
state  of  affairs  was  aggravated  by  the  increasing  difficulty  in  mak- 
ing collections,  especially  in  the  West,  and  by  the  heavy  demand 
for  capital  which  began  to  be  made  by  that  section  where  the 
absorption  of  floating  capital  in  unproductive  enterprises  was  now 
felt  in  its  full  intensity.     The  interior  banks  of  the  Eastern  and 


2/8  ESSAYS 

Middle  states  had  for  some  time  found  their  deposits  declining  and 
an  increasing  difificulty  in  keeping  out  their  circulation,  and  in  this 
state  of  things  it  could  not  be  long  before  the  country  banks  must 
make  a  serious  call  for  their  balances  in  New  York  to  protect  them- 
selves against  this  demand. 

That  from  one  or  both  of  these  causes  a  drain  had  set  in  upon 
the  New  York  banks  at  the  beginning  of  August,  is  evident  from  the 
fact  that  although  they  increased  their  loans  in  the  first  week  of 
this  month  by  $1,500,000,  their  deposits,  so  far  from  rising, 
showed  a  slight  decline,  while  their  specie  reserve  fell  off  by  more 
than  $1,000,000.  Feeling  their  condition  to  be  one  of  some  dan- 
ger, the  New  York  banks  in  the  second  week  of  August  began  a 
contraction  of  their  loans.  Although  this  contraction  was  at  first 
moderate,  it  was  instantly  followed  by  a  large  falling  off  in 
deposits,  and  this  in  turn  led  the  banks  to  protect  themselves  by  a 
still  more  rapid  reduction  of  loans.  On  the  22d  of  August  the 
banks  had  reduced  their  loans  by  a  little  less  than  $2,000,000  in 
two  weeks,  but  the  increasing  stringency  had  caused  their  de- 
posits to  fall  off  by  more  than  $5,000,000,  a  difference  which 
is  accounted  for  by  a  loss  of  nearly  $1,500,000  in  specie  re- 
serve, and  for  the  remainder  by  an  increase  of  banking  capital. 
Of  this  loss  in  reserve  a  considerable  part  was  occasioned 
by  the  withdrawal  of  balances  by  distant  banks,  which  found 
that  the  demand  upon  them  for  loans  was  increasing,  and  which 
no  doubt  were  often  called  upon  more  or  less  directly  to  lend 
their  funds  for  use  in  New  York  itself.  Thus  the  banks  of 
Boston,  the  money  centre  next  in  importance  to  New  York, 
sUghtly  increased  their  loans  during  this  period,  but  were  shortly 
after  compelled  to  begin  a  sharp  contraction  to  protect  themselves 
from  an  increasing  drain  toward  New  York.  Prices  in  the  stock 
markets  had  lately  shown  some  improvement,  but  the  general  un- 
easiness and  drain  and  the  increasing  stringency  now  made  them- 
selves felt,  particularly  in  a  general  decline  of  railroad  securities,  ex- 
hibited in  an  average  loss  of  nearly  eleven  per  cent  on  thirteen 
leading  railroad  stocks  on  the  New  York  Exchange,  between  the 
7th  and  the  21st  of  August. 

Thus  at  the  beginning  of  the  last  week  of  August  the  condi- 
tion of  affairs  had  become  such  that  it  needed  only  some  unusually 
startling  and  alarming  event  to  convert  the  general  tension  of  feel- 


THE   CRISIS   OF    1857  279 

ing  into  panic.  Such  an  event  occurred  on  Monday  the  24th,  when 
the  Ohio  Life  Insurance  and  Trust  Company  suspended  payments 
and  closed  its  doors.  This  was  a  company  with  a  capital  of 
$2,500,000,  engaged  solely  in  the  business  of  receiving  deposits 
and  making  loans.  Its  principal  office  was  in  Cincinnati,  but 
its  agency  in  New  York  City  had  gradually  absorbed  a  large 
share  of  its  business,  and  by  a  course  of  management  which  had 
been  at  least  imprudent,  was  found  to  have  reduced  the  company 
to  insolvency.  Whether  without  this  occurrence  the  money  market 
could  still  have  recovered  its  tone  may  be  matter  of  doubt ;  but  its 
happening  was  the  signal  for  uncontrollable  panic,  the  disastrous 
course  of  which  was  inevitable  in  the  absence  of  any  real  unity  of 
counsel  among  the  banks  and  of  any  important  dominating  influence 
like  that  of  the  Bank  of  England.  The  Trust  Company  was 
itself  a  large  borrower  from  the  banks  and  from  private  bankers, 
and  had  among  its  creditors  small  banks  and  depositors  both  in 
New  York  and  in  Ohio,  so  that  the  shock  and  distress  caused  by 
its  suspension  were  immediate  and  widespread.  One  of  the  smaller 
banks  of  New  York  City  failed  on  the  same  day ;  several  heavy  fail- 
ures among  bankers  and  merchants  in  New  York  and  Boston  fol- 
lowed in  quick  succession,  and  a  week  later  came  the  failure  of  an 
important  banking  firm  having  connections  at  several  points  in  the 
West.  Failures  among  country  banks  of  the  Middle  and  Western 
states  now  began  to  follow  each  other  rapidly,  and  in  the  general 
alarm  the  notes  of  solvent  banks  began  to  come  in  for  redemption 
in  large  amounts.  The  banks  of  New  York  City  continued  to  con- 
tract their  loans  as  the  alarm  and  stringency  increased,  and  with  such 
severity  as  compelled  those  in  the  other  banking  cities  to  adopt  the 
same  course.  In  three  weeks  following  the  failure  of  the  Trust 
Company  they  had  reduced  their  loans  by  more  than  $10,000,000, 
and  deposit  liabilities  were  diminished  nearly  $13,000,000.  They 
had  begun,  however,  at  this  point  to  gain  in  specie,  their 
reserve,  which  had  fallen  on  August  29  to  $9,000,000,  having 
advanced  to  $12,000,000  on  September  12.  Under  the  heavy 
pressure  of  the  panic  exchange  was  difficult  of  sale,  and  rates  had 
fallen,  so  that  although  this  caused  a  temporary  difficulty  in  the 
exportation  of  domestic  produce,  still  the  export  of  gold  had  nearly 
ceased,  and  it  promised  soon  to  become  profitable  to  import  gold 
from  Europe.     It  was  accordingly  the  opinion  of  some  financiers. 


280  ESSAYS 

and  of  some  of  the  bank  managers,  that  the  banks  should  avail 
themselves  of  this  turn  in  the  exchanges  and  their  own  increasing 
strength,  for  the  purpose  of  at  once  enlarging  their  loans,  relieving 
the  mercantile  community,  and  so  possibly  allaying  the  panic. 
But  if  this  could  still  have  been  done  by  a  combined  movement,  it 
proved  to  be  impossible  to  convince  a  large  part  of  the  banks,  and 
among  these  some  of  the  largest  and  strongest,  that  they  were 
required  to  consult  anything  except  their  own  safety,  or  that  this 
could  be  found  in  any  other  course  than  that  of  contraction. 

The  reduction  of  loans  still  went  on,  therefore,  and  in  parallel 
course  the  reduction  of  deposits.  Mercantile  firms  of  high  stand- 
ing began  to  give  way  in  all  parts  of  the  country,  and  failures 
became  more  frequent  and  heightened  the  panic  which  prevailed 
among  the  depositors  and  note-holders  of  the  interior  banks. 
Productive  industry  was  now  seriously  affected  by  the  disorder 
in  the  money  market  and  the  consequent  derangement  of  dis- 
tribution. As  early  as  the  20th  of  September  many  factories  and 
other  manufacturing  establishments  in  the  Middle  and  Eastern 
states  were  slackening  production,  or  in  many  cases  were  either 
closed  or  preparing  to  close  until  such  time  as  the  abatement  of 
the  financial  storm  might  enable  them  to  dispose  safely  of  their 
stock  of  goods,  then  large  for  the  season.  Many  establishments, 
and  some  of  the  first  magnitude,  found  themselves  embarrassed  by 
the  failure  of  commission  houses  or  of  their  agents  with  large 
liabilities  for  goods  already  delivered.  The  extreme  pressure  for 
money,  moreover,  and  the  consequent  difficulty  of  selling  exchange 
drawn  against  shipments  of  produce  combined  with  the  disorgani- 
zation of  internal  exchanges  to  discourage  the  movement  of  the 
crops,  and  the  arrival  of  flour  and  grain  at  tide-water  began  to  fall 
seriously  behind  the  receipts  of  the  preceding  year,  with  a  corre- 
sponding loss  of  traffic  by  the  railroads.  On  the  17th  of  the 
month  the  prevailing  gloom  was  deepened  by  intelligence  of  the 
loss  of  the  steamship  Central  America  on  her  way  from  the  Isth- 
mus to  New  York  with  nearly  $2,000,000  in  gold.  On  the  24th 
and  25th  of  September  the  banks  of  Philadelphia  and  Baltimore 
were  compelled  to  suspend  payments  in  specie,  in  consequence 
of  the  drain  upon  their  gold  caused  by  the  general  panic  in  the 
community ;  a  large  part  of  the  banks  in  Pennsylvania,  Virginia, 
and  Maryland  followed  their  example  upon  its  announcement  by 


THE   CRISIS   OF    1857  281 

telegraph,  and  the  banks  of  Rhode  Island  also  suspended  on  the 
28th.  The  New  York  banks  at  once  called  a  meeting  to  con- 
sider this  event  and  issued  a  circular  declaring  that  "  the  banks  of 
the  city  of  New  York  are  in  a  safe  and  secure  position  "  and 
that  they  could  "not  only  sustain' themselves  as  specie-paying 
banks,"  but  would  soon  be  able  to  assist  the  mercantile  community. 
At  that  moment  they  had  succeeded  in  raising  their  reserve  of 
specie  so  far  that  it  amounted  to  sixteen  per  cent  of  their  liabilities, 
the  latter  being  reduced  by  the  cancelling  of  $20,000,000  of 
deposits,  chiefly  in  the  payment  of  loans.  But  at  how  great  a 
cost  to  the  public  this  strengthening  of  the  banks  had  been  accom- 
plished—  if  indeed  it  were  a  real  gain  of  strength  —  was  too 
plainly  shown  by  returns  of  the  Clearing-house,  from  which  it 
appeared  that  exchanges  amounting  in  July  to  $728,000,000  had 
fallen  in  August  to  $668,000,000  and  in  September  to  $482,000,000 
—  a  reduction  which  in  a  great  commercial  centre  like  New  York 
could  mean  little  less  than  the  near  approach  of  complete  paralysis 
of  affairs. 

At  this  time  the  Treasury  of  the  United  States  had  on  hand  an 
unemployed  balance  of  nearly  $12,000,000;  and  on  the  23d  of 
September  the  Secretary  of  the  Treasury  attempted  to  administer 
some  relief  to  the  money  market  from  this  source  by  announcing 
his  readiness  to  buy  the  bonds  of  the  United  States  at  the  current 
premium.  Purchases  were  made  in  this  way  to  the  extent  of 
nearly  $4,000,000,  but  without  producing  any  sensible  relief,  and 
were  finally  discontinued  in  consequence  of  a  threatening  decline 
of  revenue  and  the  rapid  sinking  of  the  Treasury  balance. 

That  hoarding  was  going  on  at  this  time  to  some  extent 
appears  to  be  beyond  question.  With  the  increasing  demands 
upon  the  banks  both  in  the  cities  and  in  the  country  there  was 
a  steady  disappearance  of  specie,  which  could  not  longer  be 
accounted  for  by  exportation,  since  the  turn  of  exchange.  If  we 
consider  the  specie  movements  of  New  York,  by  far  the  most 
important  and  significant,  it  appears  that  during  the  month  of 
September  the  banks  and  the  Treasury  together  lost  $2,900,000 
of  specie,  to  which  we  must  add  $1,600,000  received  during  the 
month  from  California.  The  net  specie  exports  of  the  month 
were  less  than  $200,000,  so  that  we  have  a  balance  of  $4,300,000 
which  disappeared  during  the  month  from  a  market  which  was 


282  ESSAYS 

then  attracting  to  itself  specie  from  all  parts  of  the  country  and 
which  therefore  received  much  that  does  not  find  its  place  in  any 
record. 

From  the  date  of  the  suspension  of  the  Philadelphia  and  Balti- 
more banks,  the  course  of  the  panic  was  marked  every  day  by 
fresh  mercantile  failures  and  bank  suspensions.  Confidence  had 
entirely  disappeared  and  with  it  the  chief  bond  of  society  in  the 
commercial  world,  and  nothing  was  now  seen  but  a  desperate 
struggle  for  self-preservation.  The  banks  continued  their  harsh 
measures  of  curtailment,  —  measures  which  were  declared  by  them 
to  be  defensive  merely  and  by  their  half-ruined  customers  to  be 
oppressive  and  certain  to  overwhelm  all  in  a  common  ruin.  Early 
in  October  another  attempt  was  made  by  some  of  the  bank 
managers  to  secure  a  general  agreement  to  increase  loans  both 
in  New  York  and  in  Boston,  and  resolutions  were  finally  passed 
favoring  an  immediate  expansion  of  three  millions,  which  it  was 
hoped  might  give  sufficient  relief  to  turn  the  current.  But  it 
proved  to  be  easier  to  resolve  than  to  act.  Forty  or  fifty  banks, 
each  of  which  was  compelled  to  consult  its  own  safety,  could  not 
move  forward  simultaneously  in  such  a  line  of  policy,  without  some 
machinery  which  would  insure  each  against  the  possibiUty  of 
finding  itself  abandoned  by  the  others ;  and  the  concerted  move- 
ment was  accordingly  2.  fiasco.  Instead  of  the  promised  expansion 
of  $3,000,000,  the  bank  returns  for  the  week  ending  October  10 
showed  a  reduction  of  $4,000,000  in  loans  and  of  more  than  that 
amount  in  deposits.  It  was  alleged  and  was  believed  by  many 
that  the  attempt  to  enlarge  discounts  had  been  defeated  by  a  few 
of  the  stronger  banks  which  were  not  unwilling  to  drive  their 
weaker  neighbors  into  Hquidation  and  to  confine  the  business  of 
banking  to  fewer  establishments.  Whatever  basis  of  truth  this 
allegation  may  have  had,  the  mercantile  community  was  now 
appalled  at  the  prospect  before  it  of  a  continuance  of  the  struggle 
between  the  banks  and  itself.  Every  day  brought  some  fresh 
disaster.  On  the  9th  notes  of  the  Reading  Railroad  Company 
went  to  protest;  on  the  loth  it  was  announced  that  the  Erie  had 
suspended  payment,  the  Illinois  Central  had  made  an  assignment 
of  its  property  for  the  benefit  of  its  creditors,  and  the  Michigan 
Central  had  asked  for  an  extension  of  time  on  its  floating  debt. 
No  corporation  or  commercial  house  appeared  to  be  strong  enough 


THE   CRISIS   OF    1857  283 

to  resist  the  pressure  of  this  suddenly  enforced  Hquidation.  To 
the  list  of  bank  suspensions  was  now  added  the  Bowery  Bank, 
which  suspended  on  the  9th,  the  East  River  Bank  on  the  loth, 
and  the  Grocers*  Bank  on  the  12th,  all  banks  of  the  smaller  class, 
which  had  been  left  to  go  down  without  an  attempt  to  relieve  them 
by  their  stronger  neighbors.  On  Tuesday,  the  13th,  the  run,  of 
which  there  had  been  decided  premonitions  on  Monday,  set  in 
with  violence.  The  banks  were  all  besieged  from  the  opening 
of  business  by  an  excited  crowd  of  depositors  and  note  holders 
demanding  specie.  At  the  close  of  business  it  was  found  that 
eighteen  banks  had  been  obUged  to  suspend  payment  in  specie, 
and  it  had  become  certain  that  none  could  long  resist  the  demands 
of  their  depositors.  At  a  meeting  of  the  managers  late  in  the 
afternoon  it  was  resolved,  in  view  of  the  prevailing  excitement, 
that  all  should  suspend  on  the  next  day.  The  Chemical  Bank 
held  out  for  three  days,  but  was  forced  to  follow  the  example  of 
the  others  on  the  i6th.  The  banks  of  Boston  suspended  on  the 
15th  and  with  them  all  the  New  England  banks,  and  the  suspen- 
sion in  a  few  days  became  general  throughout  the  North  and 
West.  The  only  exceptions  to  it  in  the  South  were  the  banks  of 
Kentucky  and  some  of  those  of  New  Orleans.  In  both  cases  the 
sections  upon  which  the  banks  relied  were  in  a  peculiarly  strong 
position.  Kentucky  had  enjoyed  the  benefit  of  high  prices  for 
tobacco  and  of  large  crops,  and  her  banks  had  therefore  felt  less 
pressure  from  their  customers  than  those  of  almost  any  other 
state;  their  specie  resources  were  comparatively  large,  their 
deposits  small,  and  their  circulation  in  excellent  credit.  The 
banks  of  New  Orleans  also  were  in  a  community  which  found 
its  great  products  in  good  demand  and  with  the  exception  of  sugar 
in  fair  supply,  and  at  that  season  of  the  year  had  large  credits 
both  at  the  North  and  in  Europe.  They  had  for  some  years  been 
strong  in  specie  as  a  matter  of  habitual  pohcy,  and  being,  more- 
over, few  in  number,  were  able  when  the  crisis  came  to  act  in  con- 
cert upon  a  liberal  plan.  Their  deposits  showed  a  moderate 
decline  and  their  circulation  contracted  to  some  extent,  but  still 
they  kept  up  their  loans  and  even  made  a  slight  increase  of  them 
during  the  panic.  Four  of  the  New  Orleans  banks  suspended  at 
the  same  time  with  those  of  New  York,  but  the  remaining  five, 
being  about  three-fifths  of  the  bank  capital  of  the  city,  continued 


284  ESSAYS 

to  pay  all  demands  in  specie  ;  and  with  those  of  Kentucky  were 
the  only  banks  in  the  United  States  which  continued  the  full  dis- 
charge of  their  obligations.^ 

It  should  be  noticed  here  that  the  banks  of  Canada,  which 
were  also  subjected  to  heavy  pressure  by  the  crisis  in  consequence 
of  the  close  commercial  connection  between  Canada  and  the 
United  States,  were  able,  nevertheless,  to  maintain  specie  payments. 
The  directors  of  the  more  important  banks  were  able  by  concert 
to  establish  a  common  policy ;  considerable  credits  in  London 
strengthened  their  resources,  and  by  avoiding  any  unnecessary 
curtailment  of  loans  they  prevented  any  panic  among  their  cus- 
tomers and  depositors,  and  passed  through  the  crisis  safely.  It  was 
stated  that  in  their  efforts  to  prevent  any  embarrassment  in  the 
export  of  Canadian  produce  they  bought  bills  of  exchange  drawn 
against  shipments  early  in  October  at  rates  three  or  four  per  cent 
higher  than  those  at  which  they  could  then  have  bought  exchange 
in  New  York.  Their  efforts  to  sustain  the  community  depending 
on  them  were  well  rewarded,  for  the  Commercial  Bank  of  Canada, 
one  of  the  largest,  was  able  to  say  in  its  next  annual  report  that 
not  one  of  its  customers  who  were  doing  a  sound  business  had 
suspended  payments. 

In  the  United  States,  on  the  other  hand,  it  is  not  too  much  to  say 
that  before  the  general  suspension  of  specie  payments  business 
had  been  reduced  to  complete  paralysis.  Exchange  on  England 
found  so  few  buyers  that  few  bills  could  then  be  sold  above  one 
hundred,  the  real  par  being  about  one  hundred  and  nine  and  one- 
half.  Breadstuffs  and  provisions  therefore  could  not  be  moved  from 
the  West,  and  this  section  had  nothing  on  which  to  draw  domestic 
exchange  for  the  payment  of  its  debts  to  the  East.  The  receipts 
of  breadstuffs  at  tide-water  in  the  six  weeks  before  the  suspension 
had  suddenly  fallen  below  those  of  1856  by  the  equivalent  of  one 
million  barrels  of  floor.  One-half  of  the  imports  arriving  at  New 
York  went  at  once  into  the  public  warehouse  to  avoid  the  payment 
of  duties  on  articles  which  for  the  time  were  not  salable,  and  the 
withdrawals  from  warehouse  fell  to  half  their  usual  amount. 
Merchandise  of  every  kind  was  for  the  moment  a  drug,  and  an 
active  exportation  of  imported  goods  began  as  soon  as  the  con- 

1  Individual  banks  elsewhere  are  said  to  have  maintained  themselves  on  a  specie 
basis.     See  Bankers'  Magazine,  1857-1858,  pp.  505,  507,  658. 


THE   CRISIS   OF    1857  285 

dition  of  the  exchanges  would  permit.  The  loss  in  prices  in  the 
wholesale  market  and  upon  the  great  staple  necessaries  of  life 
was  immense  ;  but  it  was  observed  that  in  sales  by  retail,  consumers 
were  late  in  obtaining  any  corresponding  concession,  time  being 
necessary  as  usual  to  determine  whether  the  reduction  in  prices 
was  transient  or  likely  to  continue,  before  the  retail  dealers  could 
be  forced  to  make  their  own  prices  conform. 

In  stocks  the  fall  of  prices  was  still  heavier,  for  in  the  course 
of  the  panic  some  corporations  had  justly  lost  their  credit,  and 
others  suffered  from  bad  associations  in  the  mind  of  an  undis- 
criminating  public.  Taking  the  thirteen  leading  stocks  before 
referred  to  as  a  test,  the  quotations  show  a  loss  in  price  of  forty-three 
per  cent  in  the  two  months  ending  October  9th.  State  bonds  showed 
an  average  decline  of  ten  per  cent  in  the  same  time.  United  States 
six  per  cents  alone  held  their  old  quotations,  being  sustained  by  the 
purchases  for  the  Treasury ;  but  after  the  middle  of  October,  when 
purchases  were  discontinued  for  lack  of  funds,  these  securities  also 
fell  from  one  hundred  and  seventeen  and  one-half  to  one  hundred 
and  eleven.  To  what  extent  the  fall  in  stocks  was  increased  by 
the  return  of  stocks  held  abroad  under  the  influence  of  the  panic 
cannot  well  be  determined,  but  it  is  quite  probable  the  influence 
thus  exerted  on  the  market  was  less  than  has  been  supposed. 
Indeed,  at  the  height  of  the  crisis,  it  was  stated  in  New  York  that 
orders  for  the  purchase  of  stocks  to  a  considerable  amount  had 
been  received  from  abroad,  but  could  not  be  executed  on  account 
of  the  difficulty  in  selling  the  exchange  which  was  to  be  drawn. 

For  the  banks  and  their  customers  the  effect  of  suspension 
was  to  give  immediate  rehef  from  the  heavy  pressure,  and  to 
enable  them  to  carry  through  in  a  less  ruinous  fashion  the  Hquida- 
tion  and  the  disengagement  of  capital,  which  the  revulsion  ren- 
dered inevitable.  Individual  banks  could  now  enter  upon  a  more 
liberal  pohcy,  quite  regardless  of  the  action  of  other  banks,  since 
an  unfavorable  balance  at  the  Clearing-house  involved  no  longer 
loss  of  reserve,  and  by  refusing  to  lend  a  bank  could  not  strengthen 
itself  at  the  expense  of  its  neighbors.  The  removal  of  this  check, 
however,  was  not  followed  by  increased  loans,  but  further  con- 
traction ceased  virtually  with  suspension.^ 

1  The  bank  statements  of  the  17th  and  the  24th  of  October  show  some  further 
reduction  of  loans,  which  is  probably  accounted  for  through  the  elimination  of  failed 


286  ESSAYS 

The  movements  of  specie  at  the  height  of  the  crisis  promptly 
responded  to  the  fall  and  rise  of  foreign  exchange.  The  turn  of 
exchanges  "  in  favor  of  the  country,"  as  it  is  called,  was  effected  by 
the  news  carried  out  by  the  Baltic  on  the  28th  of  September,  four 
days  after  the  suspension  of  the  Philadelphia  and  Baltimore  banks, 
when  the  difficulty  in  selling  bills  drawn  against  shipments  had  forced 
sterling  exchange  down  to  about  one  hundred  and  five.  The  Baltic 
reached  Liverpool  on  the  6th  of  October ;  the  Bank  of  England  at 
once  raised  its  rate,  but  the  Eiiropa  on  the  loth  sailed  with  ;^63,ooo 
in  specie,  which  reached  Boston  on  the  22d.  This  was  the  real 
beginning  of  the  stream,  some  small  shipments  earlier  in  date  being 
made  upon  uncertain  grounds  and  as  a  speculation.  The  stream 
was  strongest  from  the  loth  to  the  29th  of  October,  but  continued 
to  flow  until  about  the  middle  of  November,  when  it  was  stopped 
by  the  extraordinary  pressure  in  London  and  by  the  news  that 
exchange  had  risen  in  New  York  to  a  point  which  made  the  ship- 
ment of  specie  to  Liverpool  profitable.  Indeed,  the  Asia,  which 
left  Boston  October  28th,  carried  ^100,000  a  little  in  advance  of 
the  general  returning  current  of  specie  toward  Europe,  and  some 
of  the  later  shipments  from  Liverpool  crossed  on  their  way  the 
early  returning  shipments  from  New  York,  and  more  than  one 
English  steamer  took  back  a  part  of  the  gold  which  it  had  brought 
on  its  outward  passage.  The  actual  amount  of  specie  sent  from 
England  to  the  United  States  in  these  operations  was  stated  by 
the  Governor  of  the  Bank  of  England  to  be  ;^i,  134,000. 

Specie  was  heaped  up  beyond  all  precedent  in  the  banking 
history  of  New  York ;  with  the  diminished  wants  of  business, 
deposit  liabilities  were  increased  by  the  receipts  of  specie  and  not 
as  before  the  crisis  by  the  increase  of  loans,  and  the  circulation  of 
the  banks  was  sensibly  lessened.  The  Clearing-house  returns 
show  that  the  weekly  exchanges  of  the  banks  had  fallen  by  the 
1st  of  November  to  $57,600,000,  an  amount  scarcely  equal  to  one- 
third  of  the  weekly  exchanges  in  the  latter  part  of  the  summer. 
In  the  other  banking  centres  the  course  of  things  was  the  same 
as  in  New  York,  and  even  such  country  banks  as  were  disposed 
to  maintain  their  business  on  an  unsound  basis,  found  themselves 

banks.  From  that  time  to  the  end  of  the  year  changes  in  loans,  from  week  to  week, 
were  insignificant  in  amount,  clearly  reflecting  the  condition  of  general  business  depres- 
sion, which  continued  for  many  months  after  the  acute  panic  of  October. 


THE   CRISIS   OF    1857  287 

compelled,  by  the  terms  on  which  their  circulation  was  redeemed 
in  the  cities,  to  restrict  their  issues  and  strengthen  their  position 
preparatory  to  a  return  to  specie  payment.  Specie  continued, 
however,  for  some  weeks  after  the  suspension  to  be  sold  at  a  small 
premium,  sometimes  ranging  as  high  as  three  per  cent,  when 
required  in  quantities  for  the  payment  of  duties  on  imports  or  in 
preparing  for  foreign  voyages,  until  the  banks  found  themselves 
strong  enough  to  supply  the  specie  wanted  for  such  purposes, 
in  advance  of  formal  resumption ;  whereupon  the  premium  on 
specie  disappeared.  But  with  some  restriction  in  the  terms  on 
which  the  notes  of  country  banks  were  received  on  deposit  in  the 
cities,  general  business  was  carried  on  with  the  same  paper  currency 
as  before  the  suspension,  and  with  the  same  system  of  deposits 
and  checks,  and  it  was  only  in  the  comparatively  infrequent  case 
of  a  desire  to  exchange  bank-notes  for  specie  for  some  particular 
transaction  that  the  change  to  an  inconvertible  currency  was 
observed.  In  preserving  this  condition  of  affairs  during  the  time 
in  which  the  city  banks  were  strengthening  themselves  for 
resumption,  important  relief  was  obtained  from  the  regular  semi- 
monthly receipts  of  buUion  from  California,  from  the  small  amount 
of  gold  required  for  the  payment  of  duties  on  the  diminished 
imports,  and  for  a  time  from  the  state  of  exchanges  with  Europe. 

From  this  statement  of  the  success  with  which  the  credit  of  an 
inconvertible  bank  currency  was  kept  up  during  the  two  months  of 
suspension  must  be  excepted  a  large  number  of  banks  in  the 
interior  and  particularly  in  the  West.  Early  in  the  crisis  the 
decline  of  the  securities  on  which  the  circulation  of  some  of 
the  Western  states  was  based  had  brought  their  banks  into  diffi- 
culty and  discredit.  Others  were  weakened  or  carried  down  by 
the  failures  of  individuals  or  of  railroad  corporations.  There  was, 
therefore,  throughout  the  crisis  a  rapid  forced  contraction  even  of 
such  part  of  the  Western  currency  as  was  not  withdrawn  in  con- 
sequence of  the  insolvency  of  the  issuing  banks,  and  this  increased 
the  difficulty  of  making  collections  in  the  country  and  added  to  the 
general  embarrassment  of  exchanges.  After  the  suspension  the 
process  of  contraction  still  went  on  ;  bank-notes  in  circulation  in 
other  states  were  returned  to  the  state  where  they  were  issued, 
and  in  the  Eastern  cities  a  heavy  discount  upon  Western  bank 
paper  drove  it  home.     The  process  of  calling  in  this  paper  was 


288  ESSAYS 

painful,  but  it  was  also  salutary.  It  withdrew  a  part  of  the  circu- 
lation which  had  little  real  strength  and  much  of  which  ought  never 
to  have  been  issued,  and,  leaving  only  such  part  of  the  currency  as 
was  comparatively  sound,  it  enabled  the  West  to  follow  the  East, 
though  somewhat  tardily,  in  the  resumption  of  specie  payment. 

At  the  beginning  of  December,  1857,  the  banks  of  New  York 
found  that  their  stock  of  gold  had  risen  to  $26,058,000,  or  nearly  one- 
third  of  their  liabilities,  and  was  increasing  from  week  to  week, 
while  the  demand  for  money  was  small  and  the  news  from  every 
quarter  indicated  the  restoration  of  quiet.  They  accordingly  voted 
to  resume  specie  payments  on  the  14th,  in  which  step  they  were 
at  once  followed  by  the  banks  of  Boston  and  of  a  large  part  of  New 
England,  together  with  those  of  the  state  of  New  York.  The 
banks  of  Providence  resumed  on  the  13th  of  January,  those  of 
Philadelphia  and  Baltimore  on  the  3d  and  5th  of  February,  the 
Virginia  banks  on  the  ist  of  May,  and  the  resumption  was  general 
by  midsummer.  The  returns  published  by  the  Treasury  Depart- 
ment show  that  at  the  beginning  of  1858  the  banks  of  the  United 
States  had  diminished  their  loans  by  $100,000,000;  their  deposits 
had  fallen  off  $44,000,000 ;  their  circulation  nearly  $60,000,000 ; 
while  their  specie  had  gained  about  $16,000,000;  of  which  nearly 
the  whole  was  by  the  banks  of  New  York  City.  The  diminution 
in  the  circulation  of  bank-notes,  caused  chiefly  by  the  diminished 
requirements  of  business,  was  nearly  thirty  per  cent,  taking  the 
country  as  a  whole,  while  in  the  manufacturing  centres  it  was 
even  greater.  Thus  the  country  banks  of  Massachusetts,  issuing  a 
circulation  used  by  an  active  industrial  population  and  sent  in 
the  course  of  business  into  distant  states  where  it  was  received 
with  favor,  found  their  notes  reduced  from  above  $16,000,000  to 
$9,600,000.  This  state  of  things,  sometimes  called  a  plethora  of 
capital,  but  in  fact  mere  stagnation,  continued  for  the  most  part 
until  midsummer.  The  loans  of  the  banks  were  slowly  increased 
after  January  i,  but  there  was  no  general  revival  of  business  to 
counteract  the  tendency  of  capital  to  accumulate  in  the  financial 
centres.  Nor  did  it  seek  an  outlet  by  the  exportation  of  specie 
beyond  the  receipts  from  the  mines,  for  there  was  no  demand  for 
money  abroad,  and  there  was  no  disposition,  and  indeed  little 
ability,  on  the  part  of  consumers,  to  renew  importations  of  foreign 
goods  on  any  large  scale.     The  fiscal  year  closing  with  June,  1858, 


THE   CRISIS   OF   1857  289 

showed  a  falling  off  in  imports  of  foreign  merchandise  of 
1^85,000,000,  nearly  half  of  which  was  in  the  imports  of  manu- 
factures of  cotton,  wool,  silk,  flax,  and  iron,  besides  which  the 
reexportation  of  foreign  goods  increased  by  nearly  $6,000,000. 
On  the  other  hand,  domestic  exports  suffered  a  decline  of  only 
about  $27,000,000,  chiefly  caused  by  the  reduced  demand  for 
breadstuffs,  while  the  cotton  crop,  notwithstanding  the  shock 
which  the  manufacturers  suffered  from  the  revulsion,  maintained 
its  price  so  well  in  consequence  of  the  moderate  supply  for  the 
two  cotton  years  ending  with  August,  1858,  that  the  value  of  the 
export  did  not  fall  off.  The  result  of  this  general  state  of  trade 
was  that  the  net  exportation  of  specie  from  the  United  States  for 
the  year  ending  with  June,  1858,  was  only  $33,000,000,  being 
considerably  less  than  the  product  of  the  mines. 

The  land  speculation  which  has  already  been  adverted  to  as  a 
characteristic  of  the  period  preceding  the  crisis  was  for  the  time 
crushed  by  the  revulsion.  The  receipts  by  the  government  for 
sales  of  public  lands,  which  had  already  suffered  from  the  chill 
experienced  in  advance  of  the  crisis,  fell  off  somewhat  in  the  fiscal 
year  1858  and  still  more  in  1859.  How  great  the  diminution  in 
such  transactions  was  in  some  parts  of  the  West  is  evident  from 
the  fact  recorded  by  the  Commissioner  of  Statistics  for  Ohio,  that 
the  mortgages  of  real  estate  given  in  that  state,  amounting  in 
1857  to  $38,000,000,  fell  off  to  $25,000,000  in  1858.  And  the 
number  of  emigrants  arriving  in  the  United  States,  which  is  an 
important  factor  in  the  demand  for  land,  especially  in  the  newer 
states,  fell  from  251,000  in  the  year  ending  with  June,  1857,  to 
123,000  in  the  year  ending  with  June,  1858.  Railroad  enterprises 
also  suffered  a  severe  check  from  the  revulsion ;  the  owners  of 
many  railroad  securities  found  that  their  capital  had  been  invested 
in  advance  of  the  real  wants  of  the  country,  and  as  a  natural  result 
the  number  of  miles  built  in  the  next  three  years,  1858,  1859,  and 
i860,  fell  considerably  below  that  of  the  number  built  in  the  two 
years  1856  and  1857. 

The  heaviest  pressure  from  the  revulsion  was  felt,  however,  by 
the  laboring  classes.  The  destruction  of  credit  stopped  at  once  a 
large  part  of  the  machinery  of  productive  industry.  Even  had  the 
stocks  of  goods  generally  been  small,  it  would  have  been  necessary 
for  many  manufacturers  to  stop  for  the  time,  owing  to  the  difficulty 


290 


ESSAYS 


both  of  making  sales  and  of  procuring  the  capital  with  which  to  go 
on.  But  stocks  were  large  in  most  branches  of  trade,  the  high  prices 
of  the  year  before  the  crisis  having  stimulated  production  into  great 
activity,  and  it  was  therefore  a  considerable  time  before  the  old 
supply  of  goods  was  so  far  sold  as  to  make  it  necessary  to  resume 
operations  for  the  supply  of  the  current  wants  of  the  country. 
During  this  period,  in  which  the  country  was  on  the  whole  simply 
consuming  the  accumulated  products  of  its  previous  industry,  thou- 
sands of  workmen  were  unemployed  and  thousands  of  families 
were  reduced  to  extreme  privation.  Many  corporations  and  indi- 
vidual manufacturers  attempted  to  carry  on  their  works  and  to  keep 
their  operatives  in  at  least  partial  employment,  but  not  a  few  found 
that  even  on  these  terms  it  was  impossible  to  continue  to  pile  up 
goods  for  which  there  was  no  sale  except  at  a  sacrifice,  and  were 
finally  obliged  Hke  the  others  to  suspend  their  operations  until 
better  times.     * 

How  many  persons  were  thus  thrown  out  of  employment  at  the 
beginning  of  the  cold  weather  it  is  impossible  to  say ;  but  they 
must  have  been  numbered  by  hundreds  of  thousands.  As  early  as 
the  1st  of  October  it  was  reported  that  all  the  cotton  and  woollen 
mills  near  Philadelphia  had  stopped,  and  that  the  Rhode  Island 
mills  were  either  closed  or  working  on  short  time.  And  from  that 
time  on  the  papers  of  the  day  were  full  of  the  reports  of  closing  in 
the  cotton  and  woollen  manufactures,  the  iron  trade,  the  manufac- 
ture of  boots  and  shoes,  and  of  clothing.  No  branch  of  industry 
seemed  to  escape  unscathed.  The  real  extent  of  the  calamity  may 
be  better  realized  from  a  few  significant  facts.  It  was  said  by 
a  leading  cotton  manufacturer  that  "in  January  (1858),  there 
were  502,cxdo  spindles  stopped  in  Rhode  Island  and  216,000  run- 
ning, and  these  represented  pretty  fairly  the  condition  of  the  mills 
in  other  states."  To  stop  500,000  spindles  implied  the  idleness  of 
more  than  15,000  men  and  women,  and  of  the  spindles  then  existing 
in  the  Northern  states  Rhode  Island  had  a  little  less  than  one-fifth. 
The  iron  interest  of  Pennsylvania  was  notably  slow  in  reviving, 
and  its  product  in  1858  was  estimated  at  only  one-half  that  of  the 
previous  year,  while  it  would  appear  that  from  October,  1857,  until 
the  following  spring,  the  large  majority  of  the  iron  works  were  idle. 
The  great  New  England  manufacture  of  boots  and  shoes,  which 
then  employed  80,000  operatives,  began  to  slacken  its  operations 


THE   CRISIS   OF    1857  291 

as  early  as   September,    1857,   and   remained    inactive   until   the 
next  spring. 

For  the  country  in  general  the  actual  recovery  from  the  revul- 
sion appears  to  have  begun  in  the  latter  part  of  the  winter  of 
1857-1858.  In  several  branches  of  production,  demand  began  to 
spring  up  from  the  actual  exhaustion  of  stocks  by  consump- 
tion, and  capital  then  seeking  employment  at  low  rates,  manu- 
facturing began,  in  some  cases  cautiously  and  on  a  small  scale, 
in  others,  as  in  the  cotton  manufacture,  boldly  and  even  pre- 
maturely. By  midsummer  there  was  tolerably  active  employment 
in  most  important  branches,  except  in  the  production  of  iron,  which 
was  slow  in  its  recovery  from  the  depression  of  railroad  enterprise 
and  from  the  moderate  demands  made  upon  it  by  the  other  indus- 
tries on  which  it  is  dependent.  The  resumption  of  operations  on 
their  former  scale,  however,  was  everywhere  retarded  by  the  efforts 
made  to  effect  a  general  shortening  of  the  terms  of  credit.  This 
change,  which  was  essential  for  the  soundness  of  trade,  checked 
buyers  for  a  time  and  bore  with  especial  severity  upon  the  West. 
That  region  had  suffered  from  the  revulsion  more  severely  than 
the  rest  of  the  country,  owing  to  the  collapse  of  its  real  estate  and 
railroad  speculations,  and  the  breaking  down  of  the  prices  of  its 
leading  staples  at  a  moment  when  its  purchases  had  for  some 
time  been  on  a  liberal  scale.  Entering  upon  the  new  year  of 
resumption  under  these  difficulties,  it  had  received  a  further  blow, 
for  the  crops  of  the  year  1858  were  at  best  moderate,  while  the 
continued  abundance  of  crops  in  Europe  diminished  our  exports  of 
breadstuffs  and  lowered  prices,  so  that  the  West,  in  settling  her 
indebtedness  in  that  year,  neither  had  so  much  to  sell  nor  could 
sell  it  at  so  high  rate's  as  in  the  previous  years.  The  South,  on  the 
other  hand,  was  in  far  better  condition  to  accept  shorter  credits. 
The  favorable  cotton  crop  of  the  fall  of  1857  has  already  been 
noticed  as  one  of  the  circumstances  which  strengthened  that 
section  at  the  critical  moment.  The  crop  for  1859  was  still  larger 
and  prices  firmer,  so  that  there  was  an  increase  of  1^30,000,000  in 
the  value  of  the  cotton  exported.  Moreover,  the  sugar  plantations, 
which  had  yielded  only  a  quarter  of  a  crop  in  1856,  had  given  a 
fair  product  in  1857,  and  in  1858  the  largest  but  one  that  had  ever 
been  known.  If  we  except  Virginia,  which  in  1858  had  a  short 
crop  of  tobacco,  the  South  was,  in  general,  in  a  good  condition  for 


292  ESSAYS 

the  establishment  of  a  healthier  condition  of  trade,  and  had  no 
serious  obstacle  to  overcome  except  its  own  lavish  and  improvi- 
dent habits. 

The  course  of  recovery  throughout  the  country  can  be  traced 
tolerably  well  in  returns  from  the  banks.  Bank  loans,  from  their 
low  point  at  the  beginning  of  1858,  increased  steadily  through  the 
year,  though  they  did  not  reach  their  former  heights,  taking  the 
country  as  a  whole,  until  late  in  1859.  ^^  New  York  and  Massa- 
chusetts, however,  there  was  a  more  rapid  expansion,  and  as  early 
as  August,  1858,  the  loans  in  these  two  states  had  passed  the  high- 
est point  reached  before  the  crisis  in  1857.  The  circulation  of 
the  banks,  however,  did  not  again  reach  the  point  which  it  touched 
in  that  year.  This  was  due  in  a  measure  to  the  smaller  require- 
ments of  the  country  in  a  period  of  moderate  business  activity, 
and  in  part  to  the  adoption  of  more  stringent  systems  of  redemp- 
tion, which  compelled  the  interior  banks  of  some  states  to  meet 
their  notes  with  a  promptness  to  which  they  were  not  used  and 
thus  restricted  their  circulation.  And  it  is  to  be  noticed  that  the 
severe  lessons  of  the  revulsion  led  to  some  special  efforts  toward 
placing  the  banking  system  on  a  broader  basis.  The  New  York 
Clearing-house  adopted  a  rule  requiring  the  banks  belonging  to 
it  to  keep  in  hand  coin  amounting  to  twenty  per  cent  of  their  liabili- 
ties ;  and  the  legislature  of  Massachusetts  passed  an  act  requiring 
the  banks  of  the  state  to  keep  a  minimum  of  fifteen  per  cent  of  their 
liabilities  in  specie.  A  majority  of  the  banks  of  the  city  of  New 
York  also  declared  in  favor  of  abandoning  the  practice  of  paying 
interest  on  deposits,  but  as  this  virtuous  restriction  did  not  take 
the  form  of  a  positive  rule  binding  upon  all,  it  had  no  permanent 
influence.  On  the  whole,  however,  it  is  probable  that  the  condition 
of  the  banking  system  of  the  country  after  the  revulsion,  many  as 
were  its  defects,  was  considerably  better  than  it  had  been  before. 

Notwithstanding  the  tending  to  a  gradual  return  of  activity 
and  confidence,  however,  the  year  1858  was  a  hard  period  of 
straitened  enterprise  and  small  returns.  Prices  were  low,  demand 
was  sluggish,  and  a  cold  caution  had  followed  the  fever  of  specu- 
lation. The  aspect  of  affairs  brightened  as  the  year  went  on,  but 
even  in  1859  it  could  not  be  said  that  the  effects  of  the  revul- 
sion had  ceased  to  be  felt.  Some  of  its  traces  were  indeed  indeli- 
ble.     The  ruin  of   great  mercantile  houses,  the   blighted   hopes 


THE    CRISIS   OF    1857  293 

and  fortunes  of  individuals,  mark  the  year  1857  ^s  one  of  the  most 
memorable  in  the  annals  of  commerce.  But  in  a  country  like  the 
United  States,  which  is  still  in  the  fresh  vigor  of  its  youth,  its 
natural  growth  gives  it  a  seeming  elasticity  which  enables  it  to 
surmount  all  disasters  quickly  and  soon  repairs  all  losses  and  even 
disguises  the  consequences  of  the  most  serious  errors.  Three 
years  had  not  passed,  therefore,  before  the  pursuit  of  wealth  was 
as  eager  and  confident  and  the  prosperity  of  the  country  appar- 
ently as  great  as  ever.  The  lessons  learned  in  the  bitter  months 
of  1857  were  passing  out  of  mind,  and  the  country  was  once  more 
well  advanced  in  that  inevitable  cycle,  "  quiescence,  —  next,  im- 
provement, —  growing  confidence,  —  prosperity,  —  excitement,  — 
overtrading, —  convulsion,  —  pressure,  —  stagnation,  —  distress, — 
ending  again  in  quiescence."  ^ 

1  Lord  Overstone's  Tracts,  p.  31, 


THE   CRISIS   OF    1860^ 

The  financial  condition  of  the  United  States  in  the  earlier  part 
of  the  year  i860,  although  not  disquieting,  was  far  from  satisfac- 
tory. The  recovery  from  the  disasters  of  1857  had  been  consider- 
able, but  had  not  been  so  uniformly  distributed  as  to  restore  ease 
and  a  sound  state  of  business  in  all  sections.  The  South  had  had 
the  benefit  of  large  exports  of  cotton  for  five  years  in  succession,  with 
prices  which  were  sufficiently  well  sustained  by  the  increase  in  the 
cotton  manufacture  in  all  parts  of  the  world  to  raise  the  worth  of 
the  crops  in  money  beyond  all  precedent.  Thus  the  cotton  crop  of 
1855- 1856,  the  largest  which  had  then  been  made,  was  a  little  more 
than  3,600,000  bales,  of  which  the  nearly  3,000,000  bales  exported 
were  valued  at  $128,000,000;  but  the  crop  sent  to  market  in  the 
winter  of  1 859-1 860  was  4,670,000  bales  and  the  export  value  was 
$192,000,000,  while  the  purchases  for  consumption  in  the  United 
States  were  also  larger  than  ever  before.  The  export  value  of  the 
tobacco  crop  also,  although  variable,  had  for  four  years  been  much 
above  any  previous  figures,  although  there  had  been  a  moderate 
decline  in  price  from  the  beginning  of  1858,  and  of  course  a  con- 
siderable reduction  from  the  inflated  prices  of  the  summer  of  1857. 
Sugar  had  also  become  once  more  an  important,  though  an  unsteady, 
product,  the  value  of  which  was  now  upon  a  much  higher  level 
than  before.  During  the  years  succeeding  the  great  revulsion  of 
1857  then,  the  South  had  been  prosperous,  and  its  prosperity  was 
the  more  marked  because  it  had  fewer  losses  to  be  repaired  than 
the  other  sections.  True  to  its  traditional  habits,  however,  the 
South  had  availed  itself  of  its  opportunity  to  buy  freely,  and  to  this 
end  had  used  not  only  its  large  means,  but  also  its  ample  credit. 

The  West  in  the  meantime  had  recovered  only  by  slow  degrees 
and  painfully  from  the  depression  caused  by  the  revulsion.  Its 
crops  had  been  moderate,  the  foreign  demand  for  its  great  staples 

^  See  note,  p.  266,  above. 
294 


THE   CRISIS   OF    i860  295 

had  fallen  off,  and  prices  had  been  low.  In  the  years  succeeding 
1856,  England,  the  most  important  single  customer  for  those 
products,  had  continued  to  be  a  large  buyer,  but  had  drawn  a 
smaller  proportion  of  her  supplies  from  the  United  States  than 
formerly,  in  consequence  of  the  renewal  of  her  trade  with  the 
Baltic  and  Black  seas  and  her  large  purchases  from  Germany  and 
France.  Thus  our  exports  of  breadstuffs,  which  for  each  of  the 
fiscal  years  1856  and  1857  had  been  more  than  $50,000,000,  had 
fallen  to  $32,500,000  in  1858  and  $22,800,000  for  the  fiscal  year 
i860.  The  foreign  demand  for  provisions  had  been  sustained  better, 
but  still  prices  had  been  moderate  and  had  not  been  sufficient  to 
restore  to  the  West  its  full  measure  of  prosperity  in  any  year. 

The  manufacturing  and  commercial  sections  of  the  country  had 
been  more  fortunate  in  their  recovery.  The  great  abundance  of 
capital  seeking  employment  after  the  revulsion  led  to  some  pre- 
mature efforts,  and  the  haste  with  which  the  banks  expanded  their 
loans  conduced  to  the  same  result.  Business  strengthened,  how- 
ever, by  degrees,  and  the  demand  for  labor  became  active ;  and 
although  dealers  experienced  difficulty  in  procuring  settlements 
among  their  Western  customers,  a  fairly  profitable  trade  had 
sprung  up  as  early  as  1859.  Manufacturing  became  brisk,  and  in 
many  branches  was  extended  by  the  introduction  of  new  capital 
and  additional  machinery.  In  some  branches  indeed  there  was  a 
considerable  over-production,  caused  by  the  abundance  of  capital 
and  undue  confidence  in  the  increase  of  demand,  and  followed  by 
a  reaction  in  prices. 

The  foreign  trade  of  the  country  during  these  years  is  highly 
significant.  The  fiscal  year  ending  with  June,  1858,  was  of  course 
wholly  abnormal  in  this  respect,  since  it  covered  the  period  of  the 
revulsion  and  of  the  severest  depression.  In  this  year  the  imports 
of  merchandise  fell  off  by  $85,000,000  and  the  reexports  increased 
by  $6,000,000,  so  that  the  foreign  merchandise  introduced  for  con- 
sumption was  diminished  by  $91,000,000.  On  the  other  hand,  the 
revulsion  having  been  general,  the  same  causes,  which  in  the 
United  States  checked  the  desire  to  buy,  operated  also  to  check 
purchases  from  us  by  foreign  nations,  although  in  a  less  degree, 
owing  to  the  indispensable  character  of  our  great  staple  export. 
The  export  of  merchandise  from  the  United  States  declined,  there- 
fore, in  this  year,  but  only  to  the  extent  of  $27,000,000,  and  thus 


296  ESSAYS 

the  imports  and  exports  of  nierchandise  were  for  once  nearly  equal, 
while  the  balance  of  specie  exported  was  reduced  to  $33,000,000. 
This  was  in  short  a  year  of  enforced  economy  in  which  the  people 
of  the  United  States  bought  as  little  and  sold  as  much  as  possible ; 
and  that  a  commercial  nation  whose  tonnage  earned  heavy  freights 
had  in  the  balance  of  the  year  to  pay  more  than  it  received  was, 
unquestionably,  due  to  the  debt  which  remained  to  be  settled  from 
the  year  1857  and  to  the  interest,  estimated  at  not  less  than 
^20,000,000,  payable  on  state  and  corporation  bonds  owned  in 
Europe.  The  year  1859  showed  a  great  increase  of  confidence, 
the  net  imports  of  foreign  merchandise  increasing  by  ^74,000,000 
and  falling  only  $17,000,000  short  of  the  point  reached  in  the 
fiscal  year  1857.  If  indeed  the  imports  for  the  whole  of  the  fiscal 
year  ending  with  June,  1859,  ^^^  shown  the  same  increase  as  was 
shown  by  the  last  half-year,  the  aggregate  of  1857  would  have 
been  far  exceeded.  This  heavy  increase  of  imports  in  the  last  half 
of  the  year  was  no  doubt  based  on  the  knowledge  that  the  cotton 
crop  of  the  year  was  larger  than  ever  and  on  the  state  of  ex- 
change caused  by  the  enormous  exports  of  this  product.  On 
the  whole,  the  fiscal  year  closed  with  an  apparent  excess  of  exports 
over  imports  of  only  $18,000,000,  the  exportation  of  bullion  having 
once  more  become  equal  to  our  product.  In  the  year  1858,  indeed, 
the  discredit  or  disappearance  of  so  large  a  part  of  the  bank 
currency  no  doubt  created  some  domestic  demand  for  specie 
beyond  what  was  used ;  but  this  did  not  extend  so  far  as  to  re- 
quire the  retention  of  much,  if  of  any,  of  our  product  for  the  next 
two  years.  Of  the  latter  half  of  the  calendar  year  1859,  making 
the  first  half  of  the  fiscal  year  ending  with  June,  i860,  it  is  enough 
to  say  at  present  that  it  was  marked  by  a  still  further  increase  in 
imports  and  by  the  gradually  increasing  certainty  that  the  United 
States  had  in  hand  the  largest  crop  of  cotton  ever  raised  on  its  soil. 
During  the  years  1858  and  1859,  the  banking  interest  had 
been  extended  in  every  section,  and  in  some  with  little  regard  to 
its  safety.  In  the  Western  states  particularly,  in  spite  of  the 
banks  swept  out  of  existence  in  1857,  the  bank  capital  at  the 
beginning  of  i860  showed  a  nominal  increase  of  more  than 
twenty  per  cent.  Numbers  of  banks  had  been  established  in 
several  states  on  systems  bearing  a  general  resemblance  to  the 
free  banking  system  of  New  York.     But  the  New  York  system, 


THE   CRISIS   OF    i860  297 

which  had  given  great  satisfaction,  secured  the  note-holder  from 
loss  by  limiting  the  securities  on  which  the  notes  were  issued 
to  certain  classes  of  sound  stocks ;  whereas  in  the  Northwest 
and  in  Missouri  a  wide  range  was  permitted  and  the  issues  were 
in  fact  based  to  a  great  extent  upon  stocks  which  as  the  event 
proved  were  of  unstable  value.  The  circulation  issued  in  this 
manner  was  also  excessive,  even  as  compared  with  the  standard 
of  the  United  States,  and  the  arrangements  for  its  redemption 
were  little  more  than  evasions  of  this  duty,  so  that  the  whole 
West  and  Northwest  was  overrun  with  a  practically  inconvertible 
currency  often  circulating  at  a  discount  which  made  itself  pain- 
fully apparent  when  the  holder  sought  to  buy  exchange  for  remit- 
tance to  the  East.  The  banks  of  the  South  and  Southwest,  even 
omitting  the  exceptionally  strong  ones  of  Louisiana,  were  on  a 
firmer  basis.  Indeed,  in  specie  reserves,  the  South  and  Southwest 
was  stronger  in  proportion  to  its  bank  capital  and  liabilities  than 
the  North  and  West,  notwithstanding  the  large  accumulation  of 
specie  at  New  York.  This,  however,  was  a  point  of  manage- 
ment as  to  which  neither  section  had  much  to  boast  of,  outside 
of  one  or  tvv^o  leading  cities.  In  New  Orleans  the  law  required 
the  banks  to  have  a  reserve  of  specie  amounting  to  one-third  of 
their  cash  liabilities,  and  they  usually  had  more.  In  New  York 
the  banks  by  custom  since  the  suspension  in  1857  kept  on  hand 
an  amount  of  specie  seldom  much  less  than  one-fifth  of  their 
cash  liabilities ;  and  these  two  cities  held  generally  about  forty 
per  cent  of  the  bank  specie  of  the  United  States.  In  both  the 
amount  of  specie  had  declined  considerably  during  the  year  1859. 
In  New  York,  where  the  specie  in  the  banks  had  at  one  time  in 
1858  exceeded  $35,000,000,  it  had  fallen  to  an  average  of  about 
;^20,ooo,ooo,  as  was  to  be  expected  from  the  increased  exports 
of  gold  and  the  fuller  employment  of  capital  in  business. 

The  course  which  the  banks  had  pursued  in  extending  their 
loans  from  the  beginning  of  1858  to  the  beginning  of  i860  was 
the  object  of  much  unfavorable  criticism.  During  the  period  of 
the  low  money  market,  bank  loans  were  increased  to  a  degree 
which  exceeded  the  highest  inflation  of  1857,  3.nd  while  their 
abundant  specie  made  the  position  of  the  banks  strong,  it  was 
clear  that  their  eagerness  to  employ  their  resources  was  stimu- 
lating adventurous  enterprise  in  advance  of  the  real  recovery  of 


298  ESSAYS 

the  country,  and  was  exposing  the  community  to  violent  fluctua- 
tions in  the  money  market,  and  to  the  chance  of  some  dangerous 
relapse.  Indeed,  in  the  fall  of  1859  there  had  been  a  period  of 
considerable  stringency,  which  had  passed  off,  without,  however, 
inspiring  much  additional  steadiness  in  the  management  of  the 
banks.  The  managers  of  the  banks  were  stimulated  to  take  this 
course  by  the  great  accumulation  of  capital  in  their  hands,  a  large 
part  of  which  must  have  been  idle  but  for  their  efforts  to  extend 
its  employment  in  loans ;  but  in  thus  pursuing  their  own  interests 
they  excited  speculation,  at  a  time  when  the  tendency  of  the  pubhc 
was  toward  caution,  and  gave  a  powerful  impulse  toward  a  fresh 
expansion  of  credit.  As  the  year  i860  advanced  there  was  a  dis- 
position in  some  branches  of  trade  to  lengthen  the  terms  of  credit, 
which  had  wisely  been  shortened  after  the  disasters  of  1857,  and 
to  return  to  the  old  system,  of  high  pressure. 

At  the  close  of  the  fiscal  year  ending  with  June,  i860,  it 
appeared  that  while  there  had  been  in  many  quarters  complaints 
of  irregularity  and  occasional  dulness  in  affairs,  foreign  imports 
had  exceeded  those  of  any  year,  not  excepting  1857.  The 
merchandise  imported  had  been  beyond  all  precedent ;  but  there 
was  some  diminution  of  imports  and  an  increasing  disposition  to 
send  goods  into  warehouses  in  the  closing  months  of  the  spring. 
The  immense  crop  of  cotton  had  carried  the  exports  also  beyond 
any  previous  figures  ;  but  the  deficient  demand  for  breadstuffs  had 
left  a  large  balance  to  be  settled  by  the  exportation  of  specie, 
exceeding  in  amount  the  gold  product  of  the  year.  This  remarka- 
ble recovery  in  the  demand  for  foreign  goods  at  a  time  when  pro- 
ductive enterprises  were  not  receiving  any  general  development 
could  hardly  be  deemed  a  healthy  symptom.  Indeed  there  were  plain 
indications  of  reaction  to  be  found  in  the  slackening  of  importations 
already  referred  to,  and  in  a  considerable  decline  in  the  call  for 
money  since  the  beginning  of  the  year  i860.  But,  as  the  summer 
passed  on,  all  this  was  changed  by  the  appearance  of  a  new  set  of 
conditions  in  our  commerce,  both  domestic  and  foreign.  The  year 
had  been  favorable  in  the  West,  and  it  was  found  that  that  section 
was  sending  to  market  the  largest  crop  which  she  had  then  ever 
raised.  Her  granaries  were  full  of  corn  and  wheat,  every  means 
of  transportation  was  taxed  to  its  utmost,  and  in  the  midst  of  this 
plenty  there  was  an  increasing  probability  that  Europe  would  once 


THE    CRISIS    OF    i860  299 

more  be  a  large  buyer  of  Western  wheat  and  flour.  The  West,  after 
its  two  years  of  ill-requited  effort,  had  a  prospect  of  such  prosperity 
as  she  had  never  yet  seen.  There  was  a  strong  advance  in  railroad 
stocks,  amounting  to  nearly  forty  per  cent  on  an  average  of  twelve 
important  lines  of  transportation.  Merchants  in  New  York  and 
the  East  began  to  look  with  increasing  favor  on  Western  trade, 
while  the  owners  of  shipping  advanced  their  rates  of  freight  in 
expectation  of  a  year  of  large  business  and  high  profits.  At  the 
same  time,  while  the  reports  as  to  the  probable  magnitude  of  the 
cotton  crop  were  conflicting,  there  was  hardly  any  limit  to  the  gen- 
eral confidence  in  the  elasticity  of  that  export,  and  its  capacity  to 
make  good  in  price  any  shortcoming  in  quantity. 

The  horizon  was  obscured,  however,  by  one  cloud  which  became 
more  and  more  portentous  as  the  season  advanced.  This  was  the 
increasing  gloom  in  the  political  situation  of  the  country.  The 
canvass  for  the  presidency  then  in  progress  had  assumed  a  dis- 
tinctly sectional  character,  and  there  was  a  prevailing  conscious- 
ness that  it  was  based  on  irreconcilable  differences  of  principle 
and  of  interest.  So  far  as  the  platforms  of  parties  were  con- 
cerned it  involved  only  the  old  question,  more  than  once  laid  to 
rest  as  it  was  supposed  by  our  statesmen,  of  the  extension  of 
slavery,  and  had  an  intensely  legal  and  unpractical  aspect. 
Behind  this  formal  discussion,  however,  there  was  deep  aversion 
to  the  system  of  slavery  itself  on  the  one  hand  and  devotion  to  it 
on  the  other.  Indifference  to  the  moral  bearings  of  the  subject 
had  indeed  become  impossible,  long  before  the  country  in  general 
recognized  its  impossibility.  Of  the  two  great  divisions,  the  South 
was  the  first  to  comprehend  this  and  to  realize  all  that  was  implied 
in  the  success  of  the  party  opposed  to  the  extension  of  slavery ; 
and  thus  while  even  after  the  election  in  November,  only  a  mi- 
nority of  the  Southern  people  were  prepared  for  disunion,  the  com- 
munity in  general  of  those  states  had  long  been  in  a  state  of  alarm 
at  the  prospect  before  it.  Without  any  distinct  perception  of  the 
form  which  the  danger  might  take,  the  people  of  those  states  felt 
the  increasing  probability  of  some  violent  convulsion  at  a  time  when 
the  public  in  the  Northern  states  were  for  the  most  part  inclined 
to  regard  all  predictions  of  trouble  as  merely  a  part  of  the  election- 
eering tactics  by  which  conviction  was  to  be  overcome  by  fear.  It 
is  certain  that  credit  was  affected  in  the  South  some  weeks  before 


300  ESSAYS 

it  showed  signs  of  disturbance  in  the  North.  Exchange  in  the  North 
began  to  be  difficult  of  sale  in  the  Southern  cities  before  the  end  of 
the  summer.  The  banks  of  New  Orleans,  as  appears  from  their 
returns,  had  begun  as  early  as  the  beginning  of  August  to  dimin- 
ish their  purchases  of  exchange  below  the  usual  point  and  to  call 
in  their  distant  balances,  using  their  funds  in  short  loans  on  the 
spot  apparently  as  a  precautionary  measure. 

We  must  now  observe  the  position  in  which  the  New  York 
banks  found  themselves  when  the  storm  finally  burst  upon  the 
country.  During  the  summer  these  banks  had  carried  their  loans 
above  $130,000,000,  with  a  specie  reserve  amounting  to  nearly 
twenty-five  per  cent  of  their  liabilities.  At  this  time  stock  specu- 
lation, especially  in  Western  securities,  was  active,  prices  were  buoy- 
ant, and  it  is  probable  that  a  large  part  of  the  increased  facilities 
then  afforded  by  the  banks  was  employed  in  this  direction.  The 
steady  decline  of  their  specie,  however,  in  the  last  few  weeks  of 
this  advance  and  the  approach  of  the  season  when  the  wants  of 
legitimate  business  increase,  led  the  banks  to  retrace  their  steps. 
They  contracted  their  loans,  from  the  highest  point  for  the 
summer  on  the  25th  of  August,  for  eight  weeks  at  the  rate  of 
$1,000,000  per  week,  with  a  corresponding  decline  in  deposits  while 
their  specie  reserve  underwent  little  change.  During  this  time  the 
loans  of  the  Boston  and  Philadelphia  banks  remained  almost  sta- 
tionary, and  in  New  York  it  was  a  matter  of  remark  that  the  busi- 
ness community  felt  the  contraction  but  little  and  that  the  current 
rates  for  money  were  not  greatly  affected.  The  stock  market  felt 
some  reaction,  however,  at  the  beginning  of  October,  partly  by 
reason  of  the  reduction  of  loans  and  partly  also  from  the  fact 
that  speculation  had  no  doubt  carried  prices  beyond  the  point 
which  a  single  year  of  good  business  on  the  great  lines  would 
justify.  The  market  was  weakened,  therefore,  and  became  a  little 
irregular  early  in  the  month  from  natural  causes,  quite  distinct 
from  any  political  apprehension;  but  prices  rallied  in  a  few  days, 
the  general  money  market  becoming  easier,  notwithstanding  the 
progressive  contraction  of  bank  loans.  The  state  election  in  Penn- 
sylvania, which  was  always  justly  regarded  as  an  important  index 
of  the  probable  result  in  the  national  election  in  the  following 
month,  occurred  on  the  9th  of  October,  and  the  Republican  party 
was  the  victor.     The  chances  of  political  disturbance  now  became 


THE   CRISIS   OF    i860  301 

the  argument  most  insisted  upon  by  those  who  were  operating  for 
a  fall  in  stocks ;  but  still  no  such  real  alarm  was  felt  as  to  affect 
prices  until  some  days  later.  By  the  middle  of  the  month,  how- 
ever, a  tendency  to  decHne  was  fairly  visible,  notwithstanding  the 
ease  in  money,  the  advancing  prices  for  cotton  and  breadstuffs  in 
consequence  of  an  active  foreign  demand,  and  the  downward  turn 
of  exchange,  which  had  fallen  below  the  point  at  which  specie 
could  be  profitably  shipped.  The  state  of  feeUng  now  became 
more  uneasy  every  day.  The  stock  market  became  unsettled  and 
dull,  neither  buyers  nor  sellers  being  as  yet  disposed  to  act  decid- 
edly. On  the  22d  of  October  the  bids  for  a  five  per  cent  loan  of 
$10,000,000,  advertised  by  the  United  States  government,  were 
opened  and  were  found  to  amount  in  the  aggregate  to  $10,500,000 
at  an  average  premium  of  about  one-half  of  one  per  cent.  The  rate 
was  fair,  but  still  the  transaction  did  not  strengthen  confidence, 
the  limited  amount  of  the  proposals  causing  much  remark.  The 
threatening  reports  from  the  Southern  commercial  cities  now 
attracted  attention,  and  a  sharp  decline  in  stocks  began,  which  for 
a  few  days  had  almost  the  character  of  a  panic.  In  this  movement 
the  bonds  of  Southern  states  were  of  course  seriously  affected,  the 
fall  in  those  of  Virginia,  North  Carohna,  and  Tennessee  being  on 
the  average  about  eight  per  cent  for  the  month  of  October.  The 
fall  for  the  month  in  the  securities  of  the  Western  railroads  was 
even  more  serious ;  but  a  part  of  it  was  regained  by  a  temporary 
recovery  in  the  last  few  days. 

At  this  time  and  down  to  the  presidential  election,  the  press- 
ure in  the  money  market  of  New  York  and  the  other  Eastern 
cities  was  not  serious.  Such  tendency  as  might  have  been  felt 
in  this  direction  was  no  doubt  in  part  counteracted  by  an  increase 
of  nearly  $4,000,000  in  loans  made  by  the  banks  between  the 
20th  of  October  and  the  election,  in  view  of  the  steadiness  of  their 
deposits  and  their  gain  in  specie.  In  the  Southern  cities,  how- 
ever, the  pressure  was  becoming  intense,  political  apprehension 
having  there  become  universal,  while  the  grounds  for  it  were  still 
the  subject  of  debate  at  the  North.  For  similar  reasons  the  strin- 
gency in  Baltimore  was  early  and  extreme.  In  the  Western  cities 
also  distress  began  to  be  felt,  owing  to  the  vicious  character  of  the 
local  currency  at  a  moment  when  the  abundance  of  most  forms  of 
material  wealth  had  filled  the  public  with  confidence.     Especially 


302  ESSAYS 

in  Illinois  and  Wisconsin  the  evils  of  too  free  banking  began  to  be 
cruelly  felt.  Of  ninety-four  banks  of  Illinois  issuing  a  circulation 
amounting  to  over  $12,000,000,  one-half  were  at  that  time  banks  of 
circulation  only,  engaged  in  no  business  except  that  of  issuing 
notes  based  upon  stocks  and  state  bonds,  and  of  their  securities 
nearly  two-thirds  were  bonds  of  Missouri,  Virginia,  North  Caro- 
lina, and  Tennessee,  all  of  which  were  then  rapidly  declining.  In 
Wisconsin,  where  the  circulation  of  bank-notes  was  $4,500,000,  the 
state  of  things  was  equally  bad.  The  local  currency  of  Indiana 
was  also  infected  with  the  same  disorder.  To  the  evils  of 
the  practical  inconvertibility  of  this  currency  of  the  West  and 
Northwest,  which  had  long  since  caused  some  depreciation,  was 
now  added  the  misfortune  of  thorough  loss  of  confidence  in  the 
basis  of  credit  on  which  the  currency  depended. 

The  election  of  Lincoln  as  President  on  the  6th  of  November 
was  followed  by  a  slight  movement  of  relief  in  the  market,  as  if  the 
country  breathed  more  freely  now  that  the  decision  was  made  ;  but 
this  was  followed  by  depression,  which  was  deepened  by  early  news 
from  the  South.  Not  only  did  the  resignation  of  United  States 
oflficers  in  the  South  and  the  tone  of  the  political  press  and  the 
politicians  portend  a  quick  development  of  the  movement  for 
secession,  but  there  was  a  sudden  fall  in  the  Southern  cities  of  the 
rates  of  exchange  on  New  York.  As  this  fall  occurred  at  a  time 
when  not  only  the  shipments  of  cotton  to  Europe  were  large,  but 
the  Northern  manufacturers  were  laying  in  unusually  large  stocks, 
it  was  necessarily  followed  by  an  active  shipment  of  gold  to  Charles- 
ton, Mobile,  and  New  Orleans.  This  movement  in  ten  days  carried 
off  by  the  known  channels  more  than  $3,500,000  in  specie.  The 
banks  of  course  lost  the  greater  part  of  this,  and  felt  compelled  to 
contract  their  loans.  Capital  at  once  became  scarce  and  high, 
stocks  fell  rapidly,  exchange  was  slow  of  sale  and  low,  merchan- 
dise waiting  to  be  exported  was  nearly  immovable,  and  these 
results  followed  each  other  so  quickly  that  by  the  12th  the 
panic  was  complete.  Business  was  everywhere  at  a  stand.  Col- 
lections had  become  difficult  at  the  East,  and  almost  impossible  at 
the  West,  where  there  was  now  an  actual  deficiency  of  currency 
having  any  tolerable  degree  of  credit.  The  movement  of  produce 
slackened  at  the  time  when  it  should  be  at  its  height  in  anticipa- 
tion of   the  closing  of   navigation.     Although  existing  stocks  of 


THE   CRISIS   OF   i860  303 

merchandise  were  not  excessive  in  most  branches,  the  impossi- 
bility of  moving  them  stopped  the  orders  for  fresh  supplies,  and 
production  diminished,  thousands  of  workmen  being  thrown  out 
of  work  every  day. 

The  terrors  of  this  revulsion  were  heightened  by  the  recognized 
dangers  of  the  political  situation.  The  possibility  of  some  great 
convulsion  in  our  civil  order  oppressed  the  pubHc  mind  and  made 
the  future  something  portentous  and  incalculable.  Actual  dis- 
solution of  the  Union  was  not  believed  to  be  possible,  nor  was  the 
approach  of  Civil  War  yet  credited ;  but  what  scenes  of  agitation 
might  be  before  us,  what  changes  might  impend,  and  what  loss 
of  the  great  guarantees  of  liberty  and  property,  what  interruption 
of  national  growth  and  sundering  of  the  bonds  of  sectional  inter- 
course,—  these  were  questions  which  filled  every  mind  with  fore- 
boding. This  general  condition  of  alarm  was  in  itself  enough  to 
cut  down  every  enterprise  and  to  wither  credit.  But  to  this  was 
added  the  direct  influence  of  the  absolute  destruction  of  a  large 
body  of  credit  distributed  through  all  branches  of  production  and 
of  internal  trade.  Great  numbers  of  jobbing  houses  in  the  Northern 
cities  had  their  entire  capital  at  stake  in  the  debts  which  were  due 
to  them  from  customers  in  the  South.  Many  Southern  jobbing 
houses  were  branches  of  firms  established  in  the  North  whose 
solvency  depended  on  receiving  the  collections  from  consumers  at 
the  South.  Many  Northern  manufacturers,  in  different  branches  of 
industry,  sent  their  entire  product  to  the  Southern  market.  In- 
deed, when  it  is  remembered  that  the  occupations  of  the  South  were 
chiefly  agricultural,  that  its  supplies  of  hardware,  dry  goods,  clothing, 
and  boots  and  shoes  were  drawn  chiefly  from  the  Northern  centres 
of  trade,  and  that  it  habitually  required  and  obtained  long  credit  for 
what  it  bought,  depending  on  the  coming  crop  for  the  means  of 
payment,  it  is  clear  that  the  mass  of  debts  due  to  the  North,  and 
all  made  of  doubtful  value  by  the  possibility  of  a  political  overturn, 
was  enormous.  The  rapid  disorganization  of  the  South  had  made 
it  certain  that  payment  of  a  large  part  of  their  debts  must  be 
delayed,  if  not  finally  lost ;  and  in  the  modern  use  of  credit  delay 
is  fatal.  Houses  in  the  Southern  trade,  therefore,  found  their 
credit  suddenly  impaired.  All  paper  resting  in  any  degree  upon 
Southern  trade  had  upon  it  the  taint  of  a  rapidly  increasing  sus- 
picion.    The  panic  grew  in  intensity  from  this  cause  day  by  day. 


304  ESSAYS 

Relief  which  might  have  been  possible  in  an  ordinary  crisis  be- 
came hopeless,  for  lenders  were  now  not  merely  doubtful  as  to 
their  security,  but  had  the  certainty  that  a  large  part  of  the  paper 
offered  them  had  become  weak  and  perhaps  worthless  from  a  real 
cause.  The  lending  of  money  by  private  bankers  and  discount 
houses  came  nearly  to  a  stop  from  the  unwillingness  of  lenders  to 
venture  upon  long  paper  of  any  description,  while  at  the  same 
time  call  loans  were  to  be  had  on  tolerably  easy  terms.  The  banks 
restricted  their  discounts  within  the  narrowest  possible  limits,  and 
as  they  contracted  their  loans  their  deposits  fell  off  and  their  specie 
melted  away,  leaving  them  to  press  still  more  heavily  upon  borrow- 
ers and  to  restrict  their  loans  still  farther.  In  short,  they  were  once 
more  in  the  false  position  in  which  they  found  themselves  in  Octo- 
ber, 1857,  when  they  could  neither  discount  nor  refuse  to  discount. 

By  the  17th  of  November  the  drain  of  specie  to  the  South  had 
stopped,  exchange  on  New  York  in  the  Southern  cities  having 
taken  an  upward  turn,  partly  under  the  influence  of  the  shipments 
of  specie  which  had  been  going  on  and  which  had  given  some  ease 
to  the  Southern  money  market.  But  the  panic  in  New  York  was 
no  longer  to  be  relieved  by  any  single  circumstance  of  this  kind. 
Foreign  bills  fell  to  a  lower  point  than  ever,  and  the  Atlantic,  which 
sailed  on  Saturday  the  17th,  carried  to  England  the  news  that 
bankers'  bills  on  London  sold  with  difficulty  at  1.05  (the  real  par 
being  109^-)  and  commercial  bills  at  i.oo,  with  few  buyers  even  at 
those  rates.  In  this  state  of  things  the  prices  of  merchandise  were 
beginning  to  fall  rapidly. 

This  disastrous  state  of  things  was  perhaps  felt  more  severely 
at  Chicago  than  at  any  other  place  in  the  West.  The  block  in 
foreign  exchange  at  New  York  prevented  the  possibility  of  reaUz- 
ing  on  the  immense  crop  which  the  West  had  been  pouring 
toward  the  seaboard,  and  thus  destroyed  the  means  of  payment, 
but  did  not  remove  the  pressure  of  debt,  while  with  the  fall  in 
prices  the  wealth  of  the  West  seemed  to  vanish.  Exchange  on 
New  York  had  risen  in  Chicago  to  five  to  ten  per  cent  premium 
with  little  demand,  and  the  local  currency  had  so  depreciated  that 
gold  was  sold  at  five  to  seven  per  cent  premium.  In  Cincinnati, 
exchange  was  scarce,  but  lower,  the  local  currency  being  more 
sound ;  money  was  little  demanded,  said  the  papers  of  the  day, 
because  it  was  of  no  use  to  ask  for  it. 


THE   CRISIS   OF    i860  305 

The  business  of  the  country  was,  in  fine,  at  a  dead-lock :  the 
panic  in  the  money  market  prevented  the  importers  from  buying 
bills  for  remittance  abroad  ;  the  impossibility  of  selling  bills  drawn 
against  it  stopped  the  sales  of  produce ;  this  destroyed  the  basis 
on  which  the  West  drew  its  exchange  on  the  East ;  the  Western 
merchants  being  unable  to  sell  their  produce  were  unable  to 
remit ;  and  the  falling  off  in  collections  from  the  West  intensified 
the  pressure  in  New  York.  The  machinery  of  internal  circulation 
had  stopped,  and  no  one  wheel  could  move  until  the  others  started. 
The  case  seemed  hopeless  unless  some  strong  external  force  could 
give  the  desired  impulse.  This  impulse  some  of  the  banks  of  New 
York  determined  to  give,  if  possible,  by  making  large  purchases 
of  exchange  on  their  own  account,  in  the  hope  that  the  movement 
of  trade  might  thus  be  revived  and  some  relief  given  to  the  general 
market,  while  they  should  themselves  be  able  to  secure  the  returns 
for  the  exchange  in  specie  with  only  a  few  weeks'  delay.  Accord- 
ingly, on  the  19th  it  was  announced  that  several  of  the  largest 
banks  were  ready  to  buy  sterling  bills  to  the  amount  altogether  of 
;;^5oo,ooo.  The  relief  obtained  from  this  measure,  however,  was 
not  immediate.  The  banks  found  it  difficult  to  secure  the  amount 
of  first-class  bills,  and  at  the  rates  which  they  had  expected,  and 
were  reported  to  have  finally  bought  only  to  the  extent  of  ;C6o,ooo. 
Their  action  caused  some  movement  by  private  parties,  and  thus 
helped  the  exchange  market  for  the  time,  and  caused  a  more  cheer- 
ful feeling  on  the  20th,  On  the  next  day,  however,  there  was  a 
relapse,  and  the  tone  of  affairs  became  more  alarming  than  ever. 
It  became  plain  that  without  immediate  relief  in  the  way  of  loans 
a  large  part  of  the  customers  of  the  banks  must  soon  become  in- 
solvent, for  it  was  impossible  for  even  the  most  prudent  merchant, 
after  selling  his  goods  upon  credit,  to  repay  at  short  notice  his 
borrowed  capital.  And  it  was  further  urged  by  the  merchants 
that  even  if  the  banks  were  at  any  time  justified  in  saving  them- 
selves by  breaking  their  customers,  there  was  now  no  occasion 
requiring  them  to  do  so,  for  with  the  fall  in  exchange  upon  Eng- 
land and  the  cessation  of  the  Southern  drain  of  specie  there  was 
not  only  no  demand  which  exposed  them  to  any  danger  in  case  of 
an  enlargement  of  their  liabilities  for  the  benefit  of  their  customers, 
but  there  was  every  reason  to  look  for  an  early  and  considerable 
flow  of  specie  from  Europe.     The  bank  managers  had,  perhaps, 


306  ESSAYS 

learned  something  from  the  experience  of  1857  as  to  the  effects  of 
an  unrelenting  contraction  at  such  a  moment.  At  any  rate,  they 
were  not,  as  then,  insensible  to  the  appeals  of  their  customers. 
Their  resolution  to  buy  exchange  was  an  acknowledgment  of  a 
duty  toward  the  community  and  evidence  of  a  desire  to  perform 
it,  and  if  they  were  slow  in  taking  any  more  decided  action,  it  was 
rather  from  the  difficulty  of  devising  any  course  to  be  pursued  by 
fifty  banks,  each  acting  for  itself,  than  from  any  indisposition  on  the 
part  of  the  leading  managers  to  meet  their  proper  responsibility. 

The  expedient  to  which  the  banks  finally  resorted  for  the  relief 
of  the  community  and  for  their  own  protection  at  this  frightful  junc- 
ture deserves  careful  attention.  They  now  held  in  the  aggregate  an 
amount  of  specie  which  was  equal  to  about  twenty-two  per  cent  of 
their  cash  liabilities.  This  was  a  scanty  reserve,  but  still  the  amount 
was  large  enough  to  make  it  probable  that  if  credit,  and  especially 
the  credit  of  the  banks,  suffered  no  further  shock,  it  might  be  pos- 
sible to  tide  over  the  emergency.  But  for  this  purpose  it  was 
necessary  that  the  reserve  should  be  treated  as  a  genuine  reserve, 
that  is,  as  something  to  be  used  in  pressing  necessity,  and  not  merely 
to  be  guarded,  and  that  assistance  should  be  freely  extended  to  the 
public.  In  short,  it  was  necessary  that  loans  should  be  liberally  in- 
creased, although  this  increase  might  be  attended  with  the  risk  of 
a  still  further  exhaustion  of  resources,  in  case  depositors  or  note- 
holders should  be  led  to  demand  specie.  In  the  opinion  of  the 
more  sagacious  managers  this  risk  was  not  great.  The  heavy  fall 
of  exchange  had  stopped  the  export  of  specie  and  made  it  certain 
that  the  flow  of  gold  must  set  in  from  abroad,  as  was  seen  in  1857. 
The  circulation  of  the  banks  was  under  no  suspicion,  and  their 
general  credit  was  secure,  provided  the  credit  of  the  mercantile 
community  could  be  saved.  There  was  reason,  indeed,  to  expect 
that  additional  loans,  being  used  in  payments  falling  due  at  the 
banks,  would  be  in  substance  and  to  a  great  extent  a  mere  exchange 
of  obligations  and  postponement  of  the  time  for  payment.  That 
this  rehef  might  be  given,  however,  freely  enough  to  quell  the 
panic  which  existed  and  by  sustaining  the  credit  of  individuals  to 
sustain  that  of  the  banks  themselves,  it  was  necessary  that  it  should 
be  given  by  concerted  action.  Experience  had  shown  that  no 
mere  general  understanding  was  sufficient  for  this  purpose. 
Among  upwards  of  fifty  banks,  it  was  certain  that,  if  expansion 


THE   CRISIS  OF    i860  307 

should  be  undertaken  without  some  practically  binding  arrange- 
ment, some  would  be  found  to  adopt  the  selfish  poHcy  of  leaving 
the  burden  of  expansion  upon  their  neighbors  and  using  the  oppor- 
tunity to  strengthen  themselves;  and  that  others  would  hesitate 
to  go  forward  from  fear  of  not  being  supported  by  their  neighbors. 
In  short,  the  banks  felt  the  same  necessity  for  some  sort  of  disci- 
pline, which  should  hold  in  check  the  individual  instinct  of  self- 
preservation,  which  a  regiment  feels  when  it  is  about  to  charge  in 
battle. 

The  existence  of  the  Clearing-house  Association  offered  the 
means  of  establishing  this  unanimity  of  action  which  should  make 
the  banks  one  for  the  time  and  enable  each  to  act  in  full  confidence 
of  support.  The  vast  amount  of  exchanges  made  by  the  banks 
through  the  Clearing-house,  and  the  immense  advantage  of  mak- 
ing these  exchanges  by  the  mere  offset  of  mutual  accounts  and 
settlement  of  balances,  instead  of  doing  it  by  the  laborious  process 
of  collection  by  each  bank  from  every  other,  made  the  possibility 
of  exclusion  from  the  Clearing-house  a  severe  penalty  which  few 
would  care  to  brave.  A  plan  of  operation  was  therefore  settled 
upon  which  should  become  binding  upon  all  the  banks  in  the  Asso- 
ciation when  adopted  by  three-fourths  of  them.  By  this  plan,  to 
which  all  the  banks  in  the  Association  save  one  finally  gave  their 
adhesion,  the  banks  agreed  that  for  the  purpose  of  enabling  them 
to  expand  their  loans,  the  specie  held  by  them  should  be  treated  as 
a  common  fund,  and  if  necessary  should  be  equalized  among  the 
banks  by  assessments  upon  the  stronger  for  the  benefit  of  the 
weaker,  and  that  for  the  purpose  of  settling  balances  between 
the  banks,  a  committee  should  be  appointed  with  power  to  issue 
certificates  of  deposit  to  any  bank  depositing  with  them  adequate 
security  in  the  shape  of  stocks,  bonds,  or  bills  receivable,  and  that 
these  certificates  should  be  received  in  payment  by  creditor  banks. 
The  effect  of  this  arrangement  was  that  any  bank  which  experi- 
enced an  unusual  demand  for  specie  was  supported  in  meeting  it 
by  the  whole  of  the  common  stock,  and  that  the  debt  which  it  thus 
incurred  it  could  meet  by  a  pledge  of  its  securities.  Whatever 
course  might  be  taken,  each  bank  was  as  strong  as  the  rest  in 
specie,  nor  could  any  bank,  by  holding  back  its  loans,  strengthen 
itself  at  the  expense  of  the  others,  since  the  specie  which  it  might 
thus  collect  must  by  the  agreement  be  held  for  the  general  benefit. 


308  ESSAYS 

And  finally  it  was  provided  that  after  the  ist  of  February,  1861, 
any  bank  whose  specie  fell  below  one-fourth  of  its  liabilities  should 
cease  discounting  until  that  proportion  was  recovered,  under  the 
penalty  of  expulsion  from  the  Clearing-house. 

Although  this  arrangement  was  favorably  received  by  the 
public,  and  was  indeed  rightly  regarded  as  the  turning-point  in  the 
panic,  it  was  the  subject  of  much  criticism.  It  was  declared  by 
many  to  be  equivalent  to  the  suspension  of  specie  payments,  since 
the  debts  of  the  banks  to  each  other  were  not  to  be  settled  by  the 
payments  of  specie  but  by  the  pledge  of  securities.  But  it  was 
answered  triumphantly  by  the  bank  managers  that  the  power  of 
the  public  to  obtain  payment  of  deposits  or  redemption  of  notes  in 
specie  remained  unimpaired.  So  long  as  the  convertibility  of  the 
bank-note  was  maintained,  how  could  it  be  said  that  specie  pay- 
ments were  ever  virtually  suspended,  although  the  banks  should 
mutually  forbear  to  demand  specie  from  each  other.?  The 
arrangement  was  in  fact  a  temporary  fusion  of  the  fifty  banks  of 
the  city  in  their  relations  with  each  other,  but  without  prejudice 
to  the  rights  of  the  public.  If  an  analogy  for  it  were  sought,  it 
might  be  found  in  the  suspension  of  the  act  of  1844  for  the  relief 
of  the  Bank  of  England,  and  the  consequent  substitution  of  gov- 
ernment securities  for  bullion  in  the  dealings  between  the  two 
departments  of  the  bank,  the  bank-note  remaining  convertible  as 
before. 

All  of  the  New  York  banks  entered  into  this  arrangement, 
except  the  Chemical  Bank,  an  institution  with  remarkably  large 
and  steady  deposits  and  small  circulation,  which  preferred  to  be 
cut  off  from  the  privileges  of  the  Clearing-house,  rather  than 
throw  its  large  reserve  of  specie  into  the  common  stock.  The 
effects  of  the  combination  were  instantaneous.  In  the  next  week 
the  banks  increased  their  loans  so  rapidly  that  the  average  for 
the  week  rose  by  $7,000,000,  and  the  panic,  strictly  speaking, 
came  to  an  end.  Nearly  the  whole  of  the  additional  loans 
went  to  swell  the  mass  of  deposits,  with  only  an  inconsiderable 
loss  of  specie.  The  expansion  continued  at  a  more  moderate 
rate  for  four  weeks  longer  until  on  the  2 2d  of  December  the  aver- 
age of  loans  for  the  week  stood  at  $132,000,000,  with  rapidly 
increasing  deposits  and  specie.  From  that  point,  under  the 
natural  influence  of  the  revulsion,  the  demand  for  loans  diminished 


THE   CRISIS   OF   i860  309 

and  specie  accumulated  rapidly,  this  movement  going  on  far  into 
the  year  1861.  The  Boston  banks  on  the  24th  of  November  fol- 
lowed the  example  of  the  banks  in  New  York  so  far  as  to  agree 
in  general  terms  to  discount  as  freely  as  possible  and  to  provide 
that  banks  owing  balances  in  settlement  at  the  Clearing-house 
might  pay  in  their  own  bills  to  the  extent  of  fifty  per  cent  of  the 
balances  due,  provided  the  bills  paid  did  not  exceed  a  certain 
amount,  fixed  in  proportion  to  the  capital  of  each  bank,  varying 
from  one-tenth  for  the  smallest  banks  to  one-twentieth  for  the 
largest.  The  expedient  of  throwing  their  specie  into  a  common 
fund  was  rejected  by  them,  and  they  therefore  failed  in  securing 
the  unanimity  of  action  which  distinguished  the  conduct  of  the 
New  York  banks ;  some  of  the  Boston  banks  attempted  to  expand, 
but  others  contracted,  and  the  result  was  a  slow  diminution  of 
loans  for  some  weeks,  which  bore  with  great  severity  on  the  mer- 
cantile public.  With  some  loss  of  specie,  however,  and  with  the 
aid,  it  was  said,  of  some  forbearance  by  New  York  creditor  banks 
in  calling  for  balances  due  to  them  from  Boston,  the  banks  of 
Boston  went  through  the  panic  without  suspending  specie  payment. 
It  was  too  late,  however,  or  was  for  other  reasons  impossible, 
for  banks  in  other  sections  to  adopt  the  same  course.  On  the  21st 
of  November  the  Farmers'  Bank  of  Virginia,  a  large  institution 
with  numerous  branches,  suspended  specie  payment  and  was  fol- 
lowed by  its  neighbors  on  the  next  day.  The  Baltimore  banks, 
which  had  been  severely  pressed  for  some  days  and  had  felt  the 
symptoms  of  a  run  by  their  note-holders,  suspended  on  the  22d,  and 
the  Philadelphia  banks  on  the  same  afternoon  resolved  to  take  the 
same  course.  The  St.  Louis  banks  suspended  with  one  exception 
on  the  28th,  the  South  Carohna  banks  on  the  29th,  and  the  Georgia 
banks  on  the  30th.  Of  these  suspensions  those  of  the  Southern 
banks  were  in  part  the  result  of  political  calculation,  it  being 
desired  to  retain  within  control  the  specie  which  they  held,  and 
in  part  the  result  of  the  absorption  of  specie  by  individuals  which 
had  been  going  on  through  the  South  for  some  weeks.  The 
Baltimore  banks  were  driven  to  the  same  course  by  the  action  of 
the  banks  of  Virginia  which  cut  off  a  large  share  of  the  specie 
collections  of  the  Baltimore  merchants.  Whether  the  Philadelphia 
banks  could  have  held  out  longer  or  not  may  be  a  question,  but  it 
seems  that  their  suspension,  when  it  occurred,  was  more  the  result 


3IO  ESSAYS 

of  a  want  of  concert  than  of  special  weakness  at  that  moment.  The 
banks  of  Kentucky  continued  specie  payments  throughout  this 
period  of  difficulty ;  those  of  New  Orleans  did  not  suspend  until 
September  i86r,  and  then  only,  it  was  said,  at  the  request  of  the 
Confederate  government.^ 

The  free  banks  of  the  Northwest  suffered  instant  discredit  from 
the  development  of  the  secession  movement  and  the  consequent 
decline  of  the  securities  upon  which  their  circulation  was  founded. 
From  July  to  December,  i860,  the  bonds  of  several  of  the  Southern 
states  showed  a  loss  of  twenty  to  twenty-five  per  cent ;  Missouri 
bonds  in  particular  dropped  from  eighty  to  sixty-one;  and  the  whole 
range  of  these  securities,  after  a  reaction  in  the  early  part  of  1861, 
continued  to  fall  without  hope  of  recovery.  The  Auditor  of  Illi- 
nois refused  in  November,  i860,  to  receive  any  more  Missouri 
bonds  as  security  for  notes,  the  Chicago  bankers  began  to  throw 
out  the  notes  of  country  banks  known  to  have  large  deposits  of 
Southern  bonds,  and  the  Bank  Commissioners  called  upon  thirty- 
three  banks  to  deposit  additional  security  —  a  demand  which  could 
not  be  complied  with.  Exchange  upon  New  York  rose  in  Chicago 
to  eight  or  ten  per  cent,  declining  to  five  or  six  in  the  early  part 
of  1 861.  In  May  of  that  year  the  notes  of  nearly  half  of  the  Illi- 
nois country  banks  had  been  thrown  out  in  Chicago  and  the  dis- 
count on  their  notes  ranged  from  twelve  to  twenty  per  cent.  The 
legislature  had  already  voted  to  receive  only  Illinois  stocks  on 
deposit  from  free  banks  in  the  future ;  but  this  change  came  too 
late  to  save  the  people  of  Illinois  from  what  Governor  Yates,  two 
years  after,  described  as  immense  loss.  The  Wisconsin  banks 
were  also  thrown  into  indescribable  confusion  by  the  collapse  of  a 
large  part  of  their  securities.  In  May,  1861,  the  Bank  Comptroller 
of  Wisconsin  sold  in  New  York  for  redemption  purposes  Missouri 
bonds  at  thirty-seven  and  one-half,  Tennessee  at  forty-five  and  one- 
eighth,  and  North  Carolina  at  fifty-six.  Banks  were  closed  in  quick 
succession,  leaving  their  notes  outstanding,  and  in  1863  the  comp- 
troller was  redeeming  —  at  rates  under  par  and  ranging  as  low  as 
fifty  —  the  notes  of  thirty-seven  Wisconsin  banks.  Neither  in 
Ohio  nor  in  Indiana  did  the  banks  with  secured  circulation  suffer 
as  in  Illinois  and  Wisconsin,  although  of  the  Indiana  free  banks 
many  had  to  increase  their  securities  to  make  good  the  loss  on 

1  Bankers^  Magazine,  1861-62,  p.  393. 


THE   CRISIS   OF    i860  311 

Missouri  and  Louisiana  stocks,  which  were  largely  held  by  them, 
and  as  many  as  sixteen  proceeded  to  withdraw  their  notes,  a 
small  number  suspending  altogether.  In  Missouri  also,  notwith- 
standing the  loss  of  credit  by  the  state  and  the  depreciated  local 
currency  already  noticed,  the  banks  were  able  to  meet  the  strain  of 
the  revulsion  with  a  good  face.  They  held  a  relatively  strong  coin 
reserve,  and  although  their  suspended  debt  was  of  serious  amount, 
they  were  able  to  reduce  their  circulation  and  thus  to  bring  their 
business  into  a  condition  in  which  they  could  await  the  issue  of 
the  war. 

The  specie  movement  occasioned  by  the  crisis  in  this  country 
was  larger  in  amount,  but  less  serious  in  its  consequences  than  that 
of  1857.  It  has  already  been  remarked  that  so  early  as  the  middle 
of  October  exchange  had  fallen  below  the  point  at  which  specie 
could  be  profitably  exported.  Although  there  was  a  rally  in  the 
last  part  of  the  month,  exchange  was  still  heavy  and  shipments 
finally  came  entirely  to  a  stand.  The  gold  exported  from  New 
York,  the  chief  point  of  specie  shipments  and  imports,  was  only 
;^ 740,000  for  the  months  of  November  and  December,  i860,  and 
;^23,ooo  in  January,  1861,  against  $7,190,000  in  the  same  three 
months  of  the  previous  year.  The  decisive  turn  was  given  to  the 
exchanges  by  the  news  carried  to  Europe  by  the  Atlantic,  which 
sailed  on  the  17th  of  November,  when  five  days  of  panic  had 
completely  paralyzed  the  market  for  exchange  in  New  York. 
The  Atlantic  reached  England  on  the  30th,  and  on  the  next  day 
the  Europa  sailing  from  Liverpool  took  as  freight  to  New  York 
1^540,000  in  specie.  The  tide  soon  began  to  flow  with  great 
strength,  the  Persia  which  sailed  a  few  days  later  bringing  over 
^^^3,000,000.  In  the  three  months  after  the  flow  of  specie  began  the 
receipts  of  gold  in  New  York  from  Europe  amounted  to  $12,725,000, 
and  the  importation  continued  until  the  fall  of  1861.  The  aggregate 
of  specie  imported  in  the  fiscal  year  ending  with  June,  1861,  was 
over  $40,300,000,  so  that  deducting  the  $23,800,000,  exported 
chiefly  in  the  earlier  part  of  the  year,  the  United  States  on  the 
whole  drew  from  abroad  in  this  year  $16,500,000  of  gold.  In 
no  other  year  since  the  product  of  California  became  important 
had  this  happened. 

The  first  effect  produced  in  New  York  by  the  measures  taken 
by  the  banks  of  that  city  was  to  cause  a  general  sense  of  relief 


312  ESSAYS 

and  of  returning  hope,  manifesting  itself  in  greater  ease  in  the 
money  market  and  improved  prices  for  stocks.  Had  the  crisis 
been  of  the  ordinary  type,  recovery  would  no  doubt  have  dated 
from  this  point  as  in  1857.  The  period  of  revulsion  must  of 
course  have  been  gone  through,  but,  with  the  accumulation  of 
capital,  prices  of  good  securities  must  have  begun  to  rise  at  once 
and  credit  to  regain  its  healthy  condition.  But  the  crisis  of 
i860  was  not  of  the  ordinary  type,  and  this  fact  the  public 
were  every  day  learning  to  comprehend  more  fully.  The 
confidence  imparted  by  the  action  of  the  banks  was  then 
but  temporary.  It  was  soon  felt  that  the  losses  already  ex- 
perienced from  the  secession  movement  in  the  South,  and  the 
greater  ones  yet  to  be  expected,  were  not  to  be  cured  or  averted 
by  the  mere  expansion  of  loans.  They  involved  a  real  loss  of 
capital,  and  how  far  this  might  go  could  not  be  guessed.  It 
was  only  certain  that  the  movement  was  gaining  ground,  and 
that  a  revolution  in  the  business  of  the  country  as  well  as  its 
government  became  daily  more  imminent.  After  a  few  days, 
therefore,  the  advance  in  stocks  which  followed  the  union  of  the 
banks  was  lost  under  the  increasing  pressure  in  the  money 
market,  and  prices  then  continued  to  decline  until  the  early  part 
of  December,  when  they  "touched  bottom."  Merchandise  also 
suffered  the  same  fall  in  the  few  weeks  after  the  action  of  the 
banks. 

This  continuous  fall  of  prices  after  the  21st  of  November,  it  is 
to  be  observed,  was  not  accompanied  by  any  panic.  Though  the 
demand  for  loans  was  great,  and  private  lenders  were  extremely 
reluctant  to  act,  the  banks  were  lending  freely,  and  the  appre- 
hension now  felt  was  not  that  the  means  of  payment  should  be 
unavailable,  but  that  they  should  not  exist.  Assets  of  real  value 
could  now  be  used,  though  at  some  sacrifice ;  but  what  assets  were 
of  real  value  was  a  matter  of  doubt.  Settled  gloom,  therefore, 
took  the  place  of  that  peculiar  tension  of  feeling  which  is  known 
as  panic,  and  the  country  entered  upon  a  revulsion  in  both  domestic 
and  foreign  commerce,  of  distinctly  different  character  from  that 
which  would  have  followed  the  panic  under  ordinary  circum- 
stances. This  difference  was  owing  to  the  steadily  increasing 
mass  of  Southern  indebtedness,  either  repudiated  or  suspended  in 
consequence  of  the  movement  for  secession.     The  panic,  although 


THE   CRISIS   OF    i860  313 

short,  had  been  of  frightful  severity,  and  recovery  from  its 
paralyzing  effects  must  have  been  slow.  It  had  not  been  caused, 
however,  by  any  general  unsoundness  of  business,  the  commercial 
and  manufacturing  interests  had  withstood  the  strain  with  some 
success,  the  demoralizing  effects  of  specie  suspension  had  been 
averted  in  the  great  financial  centres,  and  if  nothing  more  had 
happened,  the  return  to  a  prosperous,  although  a  reduced  business, 
would  have  followed  early  and  naturally.  And  there  is  evidence 
in  the  publications  of  the  day  that  the  observers  of  financial 
affairs  were  slow  to  admit  that  such  a  course  of  affairs  was  no 
longer  possible.  As  winter  advanced,  however,  the  unwelcome 
truth  forced  conviction  upon  every  mind  that  the  business  of  one 
whole  section  must  be  struck  out  from  all  calculations  of  payment 
for  the  past  and  of  production  for  the  future.  This  was  not  the 
mere  "  shrinkage "  in  transactions  caused  by  revulsion  of  the 
usual  type,  but  the  annihilation  of  resources  belonging  to  mer- 
chants and  manufacturers  to  the  extent,  as  has  been  estimated,  of 
more  than  ;^200,ooo,ooo.  The  pacification  of  political  troubles 
might  have  checked  and  cut  short  this  destruction ;  their  progress 
made  it  inevitable.  The  causes  now  at  work,  therefore,  although 
connected  with  these  from  which  the  panic  had  sprung,  were 
political  and  not  financial. 

It  is  useless  then  to  attempt  to  trace  farther  the  course  of 
recovery  from  the  panic  of  i860.  The  steadily  increasing  effect 
of  new  and  extraneous  influences  after  the  early  part  of  December 
disguised  the  operation  of  the  ordinary  laws  of  finance  and  distorts 
their  results. 


STATE   BANKS    IN    1860I 

The  fifteen  years  which  preceded  the  Civil  War  saw  the  currency 
of  the  United  States  estabHshed  completely,  and  to  all  appearance 
firmly,  upon  the  theories  involved  in  the  Independent  Treasury 
system.  A  long  period  of  fierce  debate  and  struggle  had  ended 
with  a  declaration  by  the  federal  government,  in  the  act  of 
August  6,  1846,  that  in  all  its  transactions  specie  alone  should  be 
received  or  paid  out  by  its  officers  after  April  i,  1847,  and  that  no 
public  moneys  should  thenceforward  be  deposited  in  banks.  This 
absolute  prohibition  of  all  use  of  banks  or  of  bank  currency,  fol- 
lowing the  repeated  and  decisive  defeat  of  projects  for  establishing 
a  Bank  of  the  United  States,  impHed  the  renunciation  of  all 
responsibility  for  the  banking  system,  on  which  the  mercantile 
community  continued  to  depend.  The  theory  of  the  Whig  leaders 
"  that  there  are  duties,  devolving  on  Congress,  in  relation  to  cur- 
rency, beyond  the  mere  regulation  of  the  gold  and  silver  coins,"  ^ 
was  rejected,  and  all  except  gold  and  silver  was  left  to  be  regu- 
lated by  the  states  at  their  discretion.  It  had  become  the  estab- 
lished order  of  things,  then,  that  the  government  should  use  coin, 
leaving  the  people  to  use  either  coin  or  such  substitutes  as  they 
might  prefer,  and  that  the  government  should  rely  upon  its  own 
strong  box,  leaving  the  people  to  set  in  operation  such  local  insti- 
tutions of  credit  as  necessity  or  ingenuity  might  suggest.  The  gold 
of  California  and  the  rush  of  industrial  growth  stimulated  by  it 
came  in  good  time  to  support  this  crude  arrangement,  and  in  i860 
it  appeared,  like  many  other  things  in  our  system,  if  not  beyond 
criticism,  at  least  safe  from  attack. 

1  The  last  three  essays  included  in  this  volume  are  a  fragment  of  a  larger  whole  de- 
signed to  present  a  history  of  the  national  hanks.  The  survey  of  state  banks  in  i860 
would  probably  have  been  somewhat  expanded,  if  we  may  judge  from  the  absence  of 
reference  to  the  banking  system  of  Louisiana.  In  scope  as  well  as  in  other  respects  the 
essays  on  "The  Establishment"  and  on  "The  Circulation  of  the  National  Banks"  were 
left  by  Professor  Dunbar  in  a  state  more  nearly  approaching  completion. 

3  Webster,  "  Works,"  iv.  328. 

314 


STATE    BANKS   IN    i860  315 

Under  such  circumstances  the  legislation  of  the  states  with 
respect  to  banks  lost  none  of  the  variety  which  had  characterized 
it  from  the  first.  From  1846  to  i860  the  state  legislatures  con- 
tinued to  act  upon  this  important  subject  without  concert  and  upon 
no  common  principle,  but  simply  as  they  happened  to  be  moved 
by  the  traditions,  habits,  or  supposed  needs  of  any  particular  com- 
munity, sometimes  under  the  stimulus  of  party  prejudice  and 
sometimes  in  obedience  to  the  local  craze  of  the  moment.  In 
some  sections  groups  of  states  finally  adopted  tolerably  similar 
systems,  showing  progress  toward  the  formation  of  a  consistent 
policy  over  considerable  areas ;  in  other  sections  no  such  crystal- 
lization was  visible.  The  history  of  the  state  bank  systems,  there- 
fore, is  a  mass  of  disconnected  details,  from  which  a  movement  of 
some  importance  within  narrow  geographical  limits  is  evolved  here 
or  there,  but  with  no  important  general  trend.  For  the  purpose 
of  making  a  general  survey  of  the  state  bank  systems,  then,  it  is 
convenient  to  confine  ourselves  to  a  survey  of  those  banks  at  some 
given  epoch.  The  beginning  of  the  year  i860  is  selected  as  the 
best  date  for  such  a  survey,  because  a  costly  experience  had  then 
brought  state  banking  on  the  whole  to  its  best  condition  prior  to 
the  Civil  War.  The  wreckage  of  the  revulsion  of  1857  had  then 
been  cleared  away,  the  business  of  the  country  had  resumed  its 
activity,  and  the  sinister  influence  of  the  impending  political  crisis 
was  not  yet  felt. 

It  is  probably  impossible  to  obtain  at  this  date  precise  informa- 
tion from  all  of  the  states  as  to  the  number  and  condition  of  the 
banks  then  existing.  Some  states  maintained  a  careful  supervision 
over  their  banks,  requiring  the  collection  and  publication  of  accounts 
at  stated  times,  but  others  made  no  such  requirements,  and  in  others 
still  the  publication  was  made  too  negligently  to  be  satisfactory. 
The  Secretary  of  the  Treasury  had  been  required  ever  since  1832 
to  lay  before  the  House  of  Representatives  annually  such  returns 
of  state  banks  "  as  may  have  been  communicated "  to  the  state 
governments  during  the  year,  and  in  default  of  such  statements  to 
present  "  other  authentic  information  "  ;  but  the  returns  thus  com- 
piled, although  exact  for  some  of  the  states,  do  not  command  con- 
fidence as  regards  others.  The  returns  published  by  the  Treasury 
may,  however,  be  corrected  and  completed  in  some  cases  by  the 
figures  collected  and  periodically  revised  for  the  Bankers'  Maga- 


3l6  ESSAYS 

sine,  that  publication  having  special  reasons  for  securing  absolute 
accuracy  if  possible.^  From  these  sources  it  appears  that  in  Janu- 
ary, i860,  there  were  at  least  1590  banks  in  twenty-nine  states  and 
the  District  of  Columbia,  besides  seven  in  the  territories  of  Kansas 
and  Nebraska.  No  banks  then  existed  in  Arkansas  ;  and  the  consti- 
tutions of  Texas,  California,  and  Oregon  forbade  the  establishment 
of  any  bank  of  issue.  The  distribution  of  these  banks  among  the 
states  points  plainly  to  differences  of  legislative  policy,  as  well  as 
to  differences  in  population,  wealth,  and  economic  conditions  ;  but 
the  most  striking  facts  in  this  respect  are  the  concentration  of 
more  than  half  of  the  banks,  both  in  number  and  in  capital,  in 
New  England  and  New  York,  the  small  number  of  banks  in  the 
planting  states,  and  the  great  irregularity  of  their  distribution  in 
the  West  and  Northwest.- 

When  we  examine  the  laws  under  which  the  several  states  had 
organized  their  banks,  it  is  difficult  to  find  any  basis  for  systematic 
arrangement  and  review.  Not  only  did  the  legislation  of  one 
state  differ  from  that  of  another  in  its  general  effect,  but,  taking 
the  states  individually,  there  were  in  some  states  banks  established 
under  several  different  systems,  and  in  others,  where  the  legislation 
permitted  a  like  diversity,  the  banks  had,  in  fact,  organized  wholly 
or  chiefly  under  some  one  preferred  system.  The  tedium  of  an 
examination  of  the  laws,  state  by  state,  may,  however,  be  avoided 
in  part,  if  we  begin  by  noting  the  fundamental  distinction  between 

1  See  table  in  Bankers'  Magazine,  April,  i860,  p.  764,  giving  figures  for  all  the 
states  for  January,  i860  ;  observe  also  the  remarks  on  page  763.  Page  975  gives  also, 
for  June,  i860,  a  list  of  all  the  banks  by  name,  the  names  of  their  officers,  and  the 
amount  of  their  capital,  showing  the  precision  of  the  information  collected. 

Capital 
No.  OF  Banks         000,000  omitted 


2  New  England        ....         507  $123 

New  York     .... 
Middle  and  District  of  Columbia 
South  Atlantic 
North  Central 
South  Central  and  Missouri  . 


162  55 

Total 1590  Jf4lo 


301  III 

180  48 

153  48 

287  25 


Wisconsin  had  104  banks,  Illinois  72,  Ohio  53,  Indiana  37,  Iowa  13,  and  Michi- 
gan 4.  Of  the  banks  in  the  South  Central  states,  those  of  Kentucky  and  Louisiana 
represented  ^33,000,000  of  capital.  —  Bankers'  Magazine,  1859-1860,  p.  764. 


STATE    BANKS    IN    i860  317 

the  banks  organized  under  special  charters  and  those  which  were 
generally  known  as  free  banks. 

In  the  earlier  part  of  the  century  the  only  method  of  in- 
corporation practised  by  any  legislature  was  incorporation  by 
special  charter.  This  method  implied  the  exercise  of  legisla- 
tive judgment  as  to  the  need  for  the  establishment  of  a  bank 
in  the  particular  locality  and  as  to  the  fitness  of  the  persons 
applying,  and  in  many  states  it  continued  to  commend  itself  to 
public  approval  down  to  the  Civil  War.  The  state,  thus  incorpo- 
rating its  banks  singly  and  after  inquiring  as  to  the  merits  of  each 
one,  in  many  cases  established  general  regulations  applicable 
to  all  its  charter  banks,  prescribing  the  limits  within  which  the 
business  of  each  should  be  confined  and  the  measures  to  be  taken 
for  supervision  or  public  information,  and  strengthening  its  system 
by  such  other  safeguards  as  the  particular  constituency  demanded 
or  would  bear.  To  this  method  of  incorporation  by  special  charter 
was  added  the  method  of  incorporation  by  general  act,  partly  as 
the  result  of  a  desire  to  systematize  banking  and  partly  under  the 
influence  of  a  growing  preference  for  general  legislation  rather 
than  special  in  all  possible  cases.  New  York  had  undertaken  in 
1829  the  doubtful  experiment  of  estabhshing  a  safety  fund,  to  be 
fed  by  annual  contributions  from  all  banks  organized  under  the 
system,  and  to  be  used  for  the  payment  of  the  debts  of  any  such 
bank  becoming  insolvent.  Without  waiting  for  the  catastrophe 
which  ultimately  disclosed  the  weakness  of  this  system,  the  legis- 
lature in  1838  adopted  the  expedient  of  requiring  any  bank  sub- 
sequently established  to  deposit  with  the  State  Comptroller 
securities  of  specified  kinds,  in  amount  sufficient  to  cover  the  notes 
to  be  issued  by  the  bank.  Making  this  provision  for  the  safety  of 
the  circulation,  it  was  easy  to  provide  also  by  general  law  that  any 
body  of  applicants,  upon  complying  with  the  terms  of  the  act, 
should  be  organized  with  banking  powers ;  and  thus  New  York 
set  on  foot  what  became  known  in  many  states  as  the  free  banking 
system,  as  distinguished  from  the  system  of  special  charters.  The 
plan  for  a  secured  currency  might  easily  have  been  grafted  upon 
the  regulations  for  banks  under  special  charters ;  but  in  fact  this 
seldom  took  place,  and  the  line  of  demarcation  between  the  free 
banks  and  the  charter  banks  was  in  most  states  maintained  to  the 
last  as  it  had  been  first  drawn.     The  free  banks  were  organized 


3l8  ESSAYS 

under  a  general  law,  with  some  plan  for  a  uniform  secured  circu- 
lation, while  the  charter  banks,  organized  by  special  acts,  presented 
no  such  uniformity  of  security. 

It  was  in  New  England  that  the  chartered  banks  were  strongest 
in  i860.  Having  a  comparatively  dense  population,  active  manu- 
facturing and  commercial  interests,  and  large  accumulations  of 
capital,  several  of  those  states  had  provided  themselves  with  banks 
early  and  rapidly.  The  legislatures  had  for  the  most  part  granted 
charters  with  great  freedom,  but  had  surrounded  the  banks  by 
rather  elaborate  general  regulations,  which  on  the  whole  conformed 
to  a  common  type.  The  New  England  chartered  bank  was  an 
incorporated  company,  having  tolerably  ample  banking  powers, 
using  its  funds  chiefly  and  often  exclusively  in  the  purchase  of 
commercial  paper,  and  depending  for  its  strength  on  the  solidity 
of  this  investment.  In  Maine  and  Massachusetts  the  expansion  of 
its  credit  by  any  bank  was  limited  by  the  prohibition  of  loans  in 
excess  of  double  the  capital,  and  by  a  limit  upon  the  debts  due  by 
the  bank.  In  most  of  the  New  England  states,  however,  the 
chief  effort  of  legislation  was  to  restrict  circulation,  this  form  of 
liability  still  continuing,  down  to  i860,  in  all  these  states  except 
Massachusetts,  to  be  more  important  in  amount  than  the  deposits. 
In  pursuance  of  this  policy  New  Hampshire,  Massachusetts,  and 
Rhode  Island  limited  the  circulation  of  the  bank  to  the  amount 
of  its  capital,  and  Rhode  Island  in  1859  limited  it  to  sixty-five 
per  cent  of  the  capital ;  Vermont  limited  all  debts  except  for  de- 
posits to  twice  the  capital ;  and  Maine  limited  the  circulation  to 
the  amount  of  capital  and  also  required  that  all  circulation  in 
excess  of  one-half  of  the  capital  should  be  protected  by  a  reserve 
of  one-third  its  amount  in  specie.  In  addition,  New  Hampshire 
and  Massachusetts  gave  to  the  notes  of  any  bank  a  first  lien  on 
its  assets,  and  Maine  made  the  stockholders  individually  liable  in 
proportion  to  their  stock  for  unpaid  notes. 

In  every  New  England  state  the  legislature  had  placed  the 
banks  under  the  supervision  of  one  or  more  Commissioners,  armed 
with  certain  powers  of  inspection  and  investigation,  and  had  provided 
for  returns  of  the  condition  of  every  bank  to  be  made  to  the  state 
authorities.  As  to  the  frequency  of  such  returns,  however,  there 
was  no  uniformity,  and  the  requirements  varied  from  the  moderate 
demand  of  Vermont  for  a  full  exhibit  of  affairs  to  the  Commis- 


STATE   BANKS   IN    i860  319 

sioner  at  his  annual  visit,  to  the  requirement  of  Massachusetts  for 
sworn  returns  to  be  given  in  weekly  by  Boston  banks  and  monthly 
by  all  others,  and  then  to  be  published  in  abstract  by  the  Secretary 
of  the  Commonwealth.  The  great  concentration  of  the  business 
interests  of  much  of  New  England  in  the  city  of  Boston,  however, 
made  up  in  part  for  the  laxity  of  the  provisions  for  publicity  made 
by  some  of  the  states.  The  great  majority  of  the  New  England 
banks  were  under  some  pressure  from  Boston  correspondents, 
prompt  to  require  payment  and  keen  to  discern  signs  of  weakness. 
There  had  grown  up,  moreover,  the  system  of  the  Suffolk  Bank, 
so  often  described,  under  which  the  New  England  banks  found 
themselves  compelled  to  provide  for  the  daily  par  redemption  of 
their  notes  in  Boston.^  This  system,  originally  introduced  in 
order  to  free  the  city  circulation  from  the  excessive  issues  of 
country  banks,  and  maintained  for  nearly  forty  years,  had  finally 
become  more  efficient  than  any  legislative  provision  in  keeping 
the  currency  of  New  England  sound  and  uniform.^  Country  banks 
were  often  made  uneasy  by  the  strict  requirements  of  an  extra- 
legal arrangement,  forced  upon  them  by  an  irresistible  power ; 
but  the  result  was  that  their  issues,  being  kept  within  legitimate 
limits,  had  unquestioned  credit  throughout  New  England,  were  at 
no  greater  discount  in  New  York  than  the  secured  notes  of  the 
country  banks  of  that  state,  and  were  even  taken  to  the  West  to 
be  used  in  making  purchases  of  produce  in  the  fall  of  the  year. 

It  cannot  be  said  that  the  New  England  system  was  at  any 
time  strong  in  specie.     In  the  years  1859  ^"^  i860  the  specie  in 

1  An  account  of  the  Suffolk  Bank  system  is  given  by  Knox,  "  History  of  Banking  in 
the  United  States,"  published  in  1900.  D.  R.  Whitney,  "The  Suffolk  Bank  "  (1878),  is 
a  full  account,  from  official  sources,  by  the  president  of  the  bank.  Nathan  Appleton, 
"Remarks  on  Currency  and  Banking"  (1841),  compendiously  describes  the  method 
followed :  "  The  country  banks  are  invited  to  keep  a  fund  in  deposit  at  the  Suffolk  bank 
for  the  redemption  of  their  bills.  If  they  decline,  the  bills  are  sent  home  for  payment, 
in  which  case  nothing  but  a  legal  payment  in  coin  will  be  received.  The  trouble  attend- 
ing this  mode  of  payment  soon  induces  the  bank  to  yield  to  its  true  interest  and  keep  up 
the  deposit.  .  .  ."  The  deposit  required  over  $2000  for  banks  with  capital  not  exceeding 
;?ioo,ooo,  with  an  increase  for  larger  capital.  At  its  height  the  daily  redemption  by  the 
Suffolk  Bank  averaged  not  far  from  $1,300,000.  The  establishment  of  the  Bank  of  Mutual 
Redemption  in  1858,  having  country  banks  among  its  stockholders,  compelled  a  division 
of  the  business,  which  finally  came  to  an  end  with  the  disappearance  of  notes  issued 
under  state  legislation. 

2  The  Massachusetts  law  of  1843,  which  forbade  any  bank  to  pay  out  notes  not  its 
own,  no  doubt  strengthened  materially  the  system  already  established. 


320  ESSAYS 

New  England  banks  amounted  to  less  than  one-eighth  of  their 
liabilities,  and  the  holdings  of  single  banks  were  often  pitiful  in 
amount.  And  yet  the  system  was  strong  in  credit.  Excessive 
issues  were  quickly  and  rigidly  checked  ;  the  commercial  relations 
of  the  region  did  not  subject  it  to  sudden  or  intense  demand 
from  outside  ;  and  the  community  felt  confidence  in  the  value 
of  assets  which  were  made  up  of  the  paper  created  in  a  regular 
and  prosperous  business.  The  use  of  specie  was  economized 
almost  to  the  last  degree,  a  smoothly  working  credit,  produced 
in  response  to  the  regular  demands  of  business,  was  substituted  for 
coin,  and  yet  the  whole  was  kept  at  the  specie  standard  by  the 
influence  exerted  at  the  central  point.  The  system  was  not  strong 
enough  to  stand  by  itself  when  the  credit  system  in  other  parts 
of  the  country  gave  way,  and  still  less  to  give  any  effective  sup- 
port to  others  under  such  conditions,  as  was  shown  by  the  suspen- 
sion of  the  New  England  banks  immediately  following  the 
suspension  of  those  in  New  York  City,  both  in  1857  and  in  1861. 
But  leaving  out  of  view  the  failure  on  these  two  occasions,  of 
which  one  was  a  world-wide  financial  catastrophe  and  the  other 
was  the  crisis  of  a  nation's  history,  the  people  of  New  England 
found  themselves  in  general  well  served  by  their  banks,  and  felt 
little  disposition  for  change.  The  free  banking  movement,  to 
which  New  York  gave  so  strong  an  impulse,  had  never  made  any 
strong  impression  in  the  New  England  states.  Vermont  and  Mas- 
sachusetts had  passed  general  banking  laws  providing  for  secured 
notes  in  185 1,  and  Connecticut  in  1852,  but  their  example  was  not 
followed  by  their  neighbors.  Moreover,  in  each  of  these  states  the 
legislature  continued  to  grant  special  charters  upon  application, 
and  no  free  bank  was  established  in  Vermont  or  Connecticut.  Mas- 
sachusetts established  none  until  i860,  when  seven  banks  under 
the  general  law  went  into  operation,  six  of  which  were  placed  in 
Boston  and  one  in  Cambridge.  Whatever  this  sudden  movement 
may  have  betokened,  it  was  speedily  lost  sight  of  in  the  greater 
changes  brought  by  the  war,  and  the  fact  remains  that  the 
chartered  banks  of  New  England  retained  almost  exclusive  posses- 
sion of  the  field  of  banking  in  those  states,  until  they  were 
replaced  by  national  banks  under  the  acts  of  Congress. 

Most  important  of  all  the  states,  as  regards  the  number  and 
capital  of  its  banks,  was  New  York.     The  Manhattan  Company 


STATE   BANKS    IN    i860  321 

and  the  New  York  Dry  Dock  Company,  incorporated  near  the 
beginning  of  the  century  with  perpetual  charters,  continued  their 
business  in  i860,  under  the  general  regulations  imposed  upon  all 
banks  by  the  statutes;  banks  incorporated  before  1829  with  char- 
ters for  limited  terms  were  still  in  existence ;  banks  incorporated 
between  1829  and  1838  issued  notes  under  the  Safety  Fund  system, 
imposed  in  the  former  year  upon  banks  thereafter  chartered.  This 
system,  requiring  of  every  bank  a  contribution  equal  to  three  per  cent 
of  its  capital  for  the  establishment  of  a  common  fund,  to  be  made 
good  by  renewed  contributions  if  impaired,  was  intended  to  secure 
the  notes  of  the  contributing  banks  by  giving  them  a  lien  on  the 
fund.  It  was  found  in  1841,  however,  that  by  a  singular  oversight 
the  law  had  been  drawn  so  as  to  charge  the  fund  with  all  the  debts 
of  an  insolvent  bank,  and  not  with  the  notes  only,  and  before  the 
legislature  was  ready  to  apply  a  remedy,  ten  banks  had  failed  and 
had  left  to  their  creditors  claims  upon  the  Safety  Fund.  The  legis- 
lature, in  1842,  changed  the  liability  of  the  fund  so  as  to  give  the 
note-holders  a  preferred  claim  upon  it ;  the  state  undertook,  more- 
over, to  meet  the  claims  left  behind  by  the  insolvent  banks,  pro- 
viding for  its  own  reimbursements  out  of  the  future  contributions 
of  the  banks  ;  but  the  Safety  Fund  system  had  lost  its  vitality,  and 
in  i860  was  little  more  than  a  name.  A  few  banks  remained,  hold- 
ing charters  which  were  to  expire  not  later  than  1866,  but  the  larger 
number  had  taken  refuge  under  the  free  banking  system. 

The  "  free  banks,"  or  banks  organized  under  the  general  bank- 
ing law  of  1838,  and  its  amendments,  had  come  to  hold  in  i860  by 
far  the  most  important  place  in  New  York.  Of  the  banking  capital 
of  the  state,  amounting  to  nearly  $1 12,000,000,  more  than  ninety  per 
cent  was  organized  under  the  general  law ;  and  of  the  1^70,000,000 
of  this  capital,  belonging  to  the  banks  in  New  York  City,  more  than 
ninety-two  per  cent.  As  the  limited  charters  of  the  incorporated 
banks  expired  free  banks  filled  the  place,  and  thus,  omitting  the 
two  cases  of  perpetual  charters,  the  banking  system  of  the  state 
promised  in  a  few  years  to  pass  under  the  general  law. 

The  details  of  the  New  York  free  banking  system  require 
little  description  or  comment,  except  in  two  or  three  particulars. 
The  fundamental  idea  of  the  law,  as  has  already  been  seen,  was  to 
insure  the  solvency  of  all  bank-notes  issued  under  its  provisions, 
by  compelling  the  deposit  of  sufficient  security  in  the  hands  of  a 


322  ESSAYS 

public  officer.  For  this  purpose  the  law,  in  i860,  after  some  sin- 
gular changes  of  policy,  admitted  stocks  of  the  United  States  and 
of  New  York,  and  also  mortgages  upon  real  estate  to  the  extent 
of  one-half  of  the  amount  to  be  secured.  Uniformity  of  security 
naturally  carried  with  it  the  idea  of  unrestricted  circulation  within 
the  limits  of  the  state,  and  the  law  therefore  contemplated  the  in- 
discriminate use  of  each  other's  notes  by  the  free  banks,  allowing 
any  bank  to  pay  out  the  notes  of  any  other  which  it  was  willing  to 
receive  at  par.  A  safeguard  against  the  risks  involved  in  these 
arrangements  was  provided,  however,  by  the  early  requirement  of 
the  redemption  of  notes  in  the  principal  cities,  and  by  the  final 
establishment  in  New  York  City  of  a  system  similar  to  that  of  the 
Suffolk  Bank.i 

In  its  earlier  years  this  system  passed  through  some  trying 
periods.  In  1844,  out  of  ninety-three  banks  organized  under  it, 
twenty-six  had  failed,  and  their  circulation  had  been  redeemed  at 
an  average  discount  of  about  twenty-five  per  cent.  But  as  early  as 
1850  the  law  of  New  York  had  become  a  model  for  other  states,  and 
in  i860  the  banks  organized  under  it  had  a  credit  which  carried 
their  notes  easily  into  adjoining  states,  and  often  in  the  course  of 
trade  into  the  Northwest.  This  credit  was  probably  due,  not  so 
much  to  the  terms  of  the  law,  which  (as  in  the  admission  of  mort- 
gage security)  sometimes  passed  the  bounds  of  prudence,  as  to  the 
reenforcement  of  the  law  by  a  generally  strict  and  vigilant  admin- 
istration, and  to  the  influence  exerted  by  the  city  banks.  As  early 
as  1 85 1  the  banks  of  New  York  City  found  it  for  their  interest  to 
organize  thoroughly  the  system  of  central  par  redemption  of  coun- 
try bank-notes;  and  in  1853  they  established  the  Clearing-house 
and  thus  brought  every  one  of  their  own  number  to  a  strict  daily 
account. 

The  free  banking  system,  with  provision  for  a  bond-secured 
note  issue,  was  followed  in  other  states  in  such  rapid  succession 
in  the  later  fifties  as  to  suggest  the  probability  that  had  not  the 
normal  course  of  development  been  interrupted,  the  system  might 
soon  have  become  general.^     At  its  best  in  New  York,  the  system 

1  A  similar  step  was  taken  by  the  Philadelphia  banks  in  1S58,  but  it  was  given  up 
after  a  short  trial.     Ba7ikers'  Magazine,  1859-1860,  pp.  13,  149. 

2  The  following  states  had  passed  free  banking  laws  down  to  1S60  :  Vermont, 
Massachusetts,  Connecticut,  New  Jersey,  Pennsylvania,  Virginia,  Tennessee,  Florida, 
Louisiana,  Ohio,  Indiana,  Illinois,  Wisconsin,  and  Iowa. 


STATE   BANKS   IN    i860  323 

was  from  its  nature  defective,  since  under  its  provisions  real  elasticity 
of  note  issue  was  nearly  if  not  quite  impossible.  In  many  of  the 
states,  moreover,  and  particularly  in  the  Northwest,  it  did  not  even 
secure  that  safety  which  is  the  sole  virtue  of  a  bond-secured  circu- 
lation. It  is  not  possible  to  determine  how  many  of  the  seventy- 
four  banks  of  Illinois  and  the  one  hundred  and  nine  banks  of 
Wisconsin  were  really  at  the  beginning  of  i860  anything  more 
than  establishments  for  the  issue  of  notes  upon  speculative  securi- 
ties.^ In  each  case  the  law  of  the  state  allowed  the  issue  of  notes 
upon  the  bonds  of  any  state  paying  its  annual  interest,  and  in  each 
the  banks  had  convinced  the  state  officers  as  to  the  soundness  of  a 
great  variety  of  bonds.  The  favorite  security  for  this  purpose  was 
for  the  time  the  six  per  cent  bond  of  Missouri.  That  state  was 
issuing  its  bonds  in  payment  for  railway  construction,  and  the 
rates  in  the  market,  which  early  in  i860  were  not  far  above 
eighty,  indicated  that  the  supply  was  not  easily  absorbed.  To 
make  a  deposit  of  the  bonds  under  the  Wisconsin  law  and 
to  take  out  an  amount  of  notes  equal  to  their  average  value  in 
New  York  for  the  preceding  six  months,  appears  to  have  been 
an  easy  method  of  obtaining  an  advance,  which  might  be  left  to 
throw  the  burden  on  the  note-holder  in  case  the  bonds  fell  still 
further.  Other  issues  of  Southern  and  Western  bonds  appear  to 
have  been  used  in  the  same  manner,  bringing  into  existence  a  mass 
of  currency  protected  by  no  real  redemption  by  the  issuing  bank, 
and  with  doubtful  security  in  the  hands  of  the  state.  Public 
indignation  found  its  vent  in  epithets  of  great  freshness  and  vigor 
applied  to  the  notes,  but  the  notes  continued  to  circulate.  It  was 
generally  recognized  that  Illinois  and  Wisconsin  did  not  use  a 
currency  of  specie  value;  it  was  hard  even  in  Chicago  to  buy  gold ;. 
and  the  propositions  made  at  intervals  for  some  scheme  of  redemp- 
tion were  generally  limited  to  redemption  in  exchange  upon  some 
more  fortunate  state  at  "reasonable  rates."  The  free  banks  in 
Indiana  were  apparently  disposed  to  follow  the  example  of  those 

1  It  was  stated  in  a  circular  of  Chicago  bankers  in  i860  that  more  than  half  of  the 
Illinois  banks  were  banks  of  circulation  only,  doing  no  business  in  their  nominal 
location.  Bankers'  Magazine,  January,  1861,  p.  585.  The  Comptroller  of  Wisconsin, 
in  January,  i860,  named  15  banks  in  that  slate  as  irresponsible,  13  having  no  place  of 
business  and  the  other  2  being  apparently  mere  places  of  issue.  That  these  were  the 
only  Wisconsin  banks  having  little  or  no  foundation  in  legitimate  business  is  highly 
improbable. 


324  ESSAYS 

in  Wisconsin  and  Illinois,  They,  too,  held  Missouri  and  Southern 
bonds  freely,  and  sought  to  devise  some  plan  for  preventing  the 
frequent  return  of  circulation  for  redemption,  but  could  agree  upon 
nothing  except  common  hatred  for  the  Bank  of  the  State  of 
Indiana,  which  pushed  them  hard  by  the  regular  return  of  their 
notes.i  As  for  Missouri  itself,  the  currency  there  was  freely  recog- 
nized as  inconvertible.  The  bank  commissioner  of  the  state  early 
in  i860  reported  that  bank-notes  were  at  a  discount  of  one  or  one 
and  one-half  per  cent  compared  with  gold,  and  one  per  cent  below 
the  notes  of  the  state  banks  of  Indiana  and  Ohio  and  the  banks  of 
Kentucky,  Tennessee,  and  Louisiana.  The  state  itself  had  paid 
one  and  one-half  per  cent  for  exchange  in  order  to  remit  money 
for  its  annual  interest  due  in  New  York ;  and  in  March  the 
Chamber  of  Commerce  of  St.  Louis  resolved  that  it  was  necessary 
to  return  to  the  specie  basis.^ 

The  difference  in  the  value  of  local  currencies,  which  thus 
culminated  in  the  West,  necessarily  showed  itself  in  published  rates 
of  discount  on  "  foreign  "  notes  in  most  of  the  principal  cities.  In 
some  cases  notes  were  sent  in  large  sums  to  be  put  into  circulation 
at  a  distance  from  home  ;  in  other  cases  they  found  their  way  to 
distant  places,  in  small  amounts  in  the  pockets  of  individuals.  In 
either  case  they  often  fell  into  the  hands  of  the  dealers  in  "  uncur- 
rent  money,"  who  carried  on  a  profitable  business  in  buying  such 
notes,  often  at  low  rates,  and  either  selling  them  for  remittance,  or 
sending  them  home,  to  be  redeemed  or  to  be  put  into  circulation 
anew,  as  the  case  might  be.  But  notwithstanding  the  discount 
upon  "  foreign  "  notes  when  bought  or  sold,  they  made  their  way 
into  circulation,  and  sometimes  to  a  serious  extent,  whenever  the 
local  banks  failed  to  enforce  a  rigid  exclusion.  Complaint  was 
made  that  Missouri  notes  accumulated  in  Cincinnati,^  the  banks 
there  preferring  to  pay  them  out  rather  than  incur  the  expense  of 
sending  them  home,  and  Illinois  and  Wisconsin  notes  overran  the 
whole  Northwest.*  That  all  this  confusion  implied  great  in- 
convenience and  certain  loss  for  the  unwary,  even  in  dealing 
with  genuine  notes,  is  clear.  But  there  was  also  an  added  dan- 
ger arising  from  the  multitude  of  counterfeited  notes.     The  art 

1  Bankers'  Magazine,  1859-1860,  p.  913.  2  JUd.,  pp.  811-S17. 

3  Ibid.,  p.  152. 

*  "  Iowa  State  Bank  and  Western  ]5anking,"  in  Bankers'  Magazine,  1859-1860,  p.  609. 


STATE    BANKS   IN    i860  325 

of  bank-note  engraving  was  then  well  advanced,  as  the  natural 
result  of  the  needs  of  a  multitude  of  banks  having  different  plates. 
The  business  of  engraving  had  been  concentrated  in  a  few  hands, 
and  much  highly  creditable  work  was  produced.  The  counter- 
feiter found  his  opportunity,  however,  in  the  vast  variety  of  the 
notes  in  use,  and  in  the  probability  that  no  person  would  be 
familiar  with  the  appearance  of  many  issues.  Only  the  expert 
could  know  the  characteristics  of  a  multitude  of  plates,  and  detect 
at  sight  the  variation  from  the  original,  which  might  be  as  difficult 
of  precise  definition,  and  yet  as  real,  as  the  difference  in  the  features 
of  two  brothers.  A  pamphlet  bank-note  detector  was  a  part  of  the 
outfit  of  every  well-provided  counting-room.  The  published  detect- 
ors rivalled  each  other  in  the  completeness  of  their  information, 
and  the  test  of  latest  counterfeits  was  a  valuable  contribution  regu- 
larly made  by  the  financial  publications.  The  New  England  banks 
had  an  efficient  Association  for  the  Suppression  of  Counterfeiting, 
and  another  went  into  operation  in  i860  in  Philadelphia. ^  But  no 
small  part  of  the  people  found  themselves  frequent  losers  by  imita- 
tions of  a  currency  to  which  they  could  apply  no  certain  test  and 
for  which  they  could  obtain  no  substitute. 

The  free  banking  system,  in  some  of  the  Western  states,  found 
a  formidable  rival  in  the  state  banks  organized  on  the  model 
adopted  by  Indiana  in  1834.  After  some  unsatisfactory  adventures 
in  banking,  Indiana,  in  that  year,  in  view  of  the  probable  disappear- 
ance of  the  Bank  of  the  United  States,  instituted  a  system  under 
which  local  banks  established  in  different  parts  of  the  state,  as 
branches  of  an  organization  to  be  known  collectively  as  the  State 
Bank  of  Indiana,  were  to  be  placed  under  the  supervision  of  a 
central  Board  of  Control.  The  capital  of  any  board  was  to  be 
subscribed  in  equal  parts  by  the  state  and  by  individuals,  the  state 
also  lending  its  credit  to  enable  individuals  to  make  full  payment 
for  their  shares  in  cash.  Prudent  management  of  an  essentially 
sound  institution  brought  the  State  Bank  safely  through  the  re- 
vulsion of  1837,  though,  like  banks  throughout  the  country  gen- 
erally, it  was  obliged  to  suspend  specie  payments,  and  it  carried 

^  The  New  England  Association  for  the  suppressing  of  counterfeiting  "  paid  for 
sentencing"  two  hundred  and  twenty-eight  persons  during  the  four  years  1858  to  1861. 
It  received  an  annual  subsidy  from  the  state  of  $1500.  For  its  report  for  1859,  see 
Bankers'  Magazine,  1 859-1 860,  p.  705. 


326  ESSAYS 

on  a  profitable  business,  enjoying  high  credit  and  performing  valu- 
able public  service  until  the  expiration  of  its  charter  in  1857. 

To  take  its  place  a  new  bank  was  chartered  in  1855,  organized 
upon  a  similar  plan,  but  having  all  its  capital  suppHed  by  indi- 
viduals, and  went  into  operation  at  the  beginning  of  1857,  under 
the  name  of  the  Bank  of  the  State  of  Indiana.  The  act  of  incor- 
poration provided  for  opening  fifteen  to  twenty  branches  ^  in  dif- 
ferent parts  of  the  state,  every  branch  to  have  a  capital  of  at  least 
$100,000  and  the  aggregate  being  limited  to  $6,000,000.  Every 
branch  had  its  own  board  of  directors  and  its  own  stockholders, 
among  whom  its  profits  were  to  be  divided ;  but  although  distinct 
from  each  other  the  branches  were  not  independent.  Over  them 
all  was  the  bank,  supported  by  proportional  assessments  upon  the 
branches,  represented  by  a  board  of  directors,  of  whom  four  were 
elected  by  the  legislature  and  one  by  every  branch,  and  existing 
for  the  purpose  of  inspecting  and  controlUng  the  branches.  The 
directors  of  the  bank  fixed  the  number  of  directors  for  every 
branch  and  appointed  two  among  them.  They  could  also  restrict 
the  discounts  of  any  branch  to  one  and  a  quarter  times  its  capi- 
tal ;  and  although  they  could  not  compel  the  transfer  of  capital 
from  one  branch  to  another,  they  had  authority  to  close  any  branch 
after  the  first  year,  if  it  did  not  earn  six  per  cent.  In  addition  to 
these  guarantees  against  mismanagement  and  to  the  further  secur- 
ity afforded  by  ample  provision  for  reports  from  all  and  for  both 
stated  and  discretionary  examinations  by  the  central  board,  the 
branches  were  made  liable  for  each  other's  debts,  and  the  stock- 
holders were  also  made  personally  liable  to  an  amount  equal  to 
their  stock.  Notes  for  circulation  were  supplied  to  the  branches 
by  the  parent  bank,  the  issue  being  limited  to  twice  the  capital  of 
the  issuing  branch  ;  and  the  suspension  of  specie  payments  was 
forbidden  under  a  penalty  of  heavy  interest  to  the  holder  of  notes 
on  which  payment  should  be  refused  or  delayed.  The  average  dis- 
counts of  any  bank  were  limited  to  the  amount  of  its  deposits,  and 
two  and  a  half  times  its  capital  and  some  strict  regulations  were 
prescribed  as  to  the  kind  of  loans  to  be  made. 

The  Bank  of  the  State  of  Indiana  was  therefore  a  cluster  of 
banks    submitting   to    mutual   inspection    and    control,  —  for   the 

1  The  law  j^rovided  for  the  division  of  the  state  into  "  not  less  than  fifteen  nor 
more  than  twenty  districts,"  and  the  larger  number  was  in  fact  taken. 


STATE   BANKS   IN    i860  327 

parent  bank  was  in  fact  the  representative  of  all,  —  and  accepting 
mutual  responsibility  for  debts.  The  organization,  then,  was 
essentially  conservative,  and  its  cautious  movement  lost  nothing 
in  steadiness  under  the  firm  hand  of  Hugh  McCulloch,  its  first 
president.  It  passed  through  the  crisis  of  1857  without  discredit, 
and  in  i860  was  recognized  as  a  sound  and  valuable  system, 
under  which  healthy  business  and  prudent  management  supplied 
all  needful  guarantees  for  every  class  of  creditors, 

Ohio  followed  the  example  of  Indiana  in  1855,  by  incorporating 
the  State  Bank  of  Ohio,  also  a  group  of  closely  allied  banks,  with 
a  maximum  capital  of  $6,150,000.  In  its  general  characteristics 
the  Ohio  State  Bank  differed  but  little  from  the  Indiana  model, 
except  that  instead  of  making  the  branches  liable  for  each  other's 
obligations,  the  Ohio  system  instituted  a  Safety  Fund,  to  be  held 
by  the  central  Board  of  Control  and  supported  by  a  contribution 
required  from  every  branch  to  an  amount  equal  to  ten  per  cent  of 
its  circulation.  The  branches  were  required  to  receive  each  other's 
notes  at  par  ;  the  issue  of  each  branch  was  limited  to  twice  its 
capital  if  this  did  not  exceed  $100,000,  and  in  a  descending  ratio 
for  any  additional  $100,000;  and  the  Board  of  Control  could 
require  any  branch  to  reduce  its  circulation  within  safe  limits.  The 
liability  of  stockholders  was  limited  to  an  amount  equal  to  one- 
third  of  the  capital  paid  in.  To  these  regulations  and  to  some 
restriction  upon  the  indebtedness  of  any  branch  beyond  its  circu- 
lation and  deposits,  the  Ohio  system  added  the  requirement  of  a 
reserve  of  thirty  per  cent  of  the  amount  of  notes  outstanding. 
Of  this  reserve  at  least  one-half  was  required  to  be  in  coin  and  for 
the  remainder  the  branch  was  allowed  to  count  cash  deposits  in 
New  York,  Boston,  Philadelphia,  or  Baltimore  as  the  equivalent  of 
coin.  Organized  upon  this  plan  the  State  Bank  of  Ohio  had  in 
i860  thirty-six  branches.  The  system  was  in  strong  condition  and 
good  credit,  and  well  able  to  resist  the  approaching  convulsion. 

Iowa  began  its  life  as  a  state  in  1846  under  a  constitution 
which  in  one  section  forbade  the  creation  of  any  corporation  with 
the  privilege  of  issuing  notes  "  to  circulate  as  money,"  and  in 
another  forbade  the  creation  of  any  "  corporations  with  banking 
privileges."  The  necessities  of  modern  life,  however,  and  the 
example  of  Indiana  and  Ohio  wrought  so  powerfully  upon  Iowa, 
that  in  the  revised  constitution  of  1857,  after  providing  for  the  sub- 


328  ESSAYS 

mission  of  all  acts  relating  to  banking  corporations  to  popular 
vote,  express  authority  was  given  to  establish  a  state  bank  with 
branches,  to  be  founded  on  a  specie-paying  basis  and  with  a 
mutual  responsibility  among  the  branches  for  each  other's  circu- 
lating notes.  Under  this  authority  the  legislature  in  1858  incor- 
porated the  State  Bank  of  Iowa,  with  a  possible  aggregate  capital 
of  1^6,000,000,  with  the  capital  of  each  branch  limited  to  ^50,000  as 
its  minimum  and  $300,000  as  its  maximum,  and  with  the  same 
concentration  of  supervisory  power  in  a  central  board  of  directors 
as  in  the  State  Banks  of  Indiana  and  Ohio.  A  Safety  Fund, 
amounting  to  one-eighth  of  the  circulation,  was  established  in  the 
hands  of  the  parent  bank,  and  the  circulation  of  every  branch  was 
limited  in  proportion  to  its  capital,  —  on  the  first  $100,000  to 
double  the  amount,  and  so  with  a  descending  scale  for  additional 
amounts  of  capital.  A  reserve  of  coin  equal  to  one-fourth  of  the 
circulation  was  required,  and  also  a  similar  reserve  in  current  funds 
for  the  deposits.  Any  branch  refusing  to  pay  its  notes  in  coin  on 
demand  was  to  be  declared  insolvent,  and  the  State  Bank  was 
at  once  to  take  possession  of  its  effects,  in  order  to  apply  the 
Safety  Fund,  or  enforce  the  mutual  responsibility  of  the  branches. 
Behind  this  responsibility  lay  the  personal  Hability  of  all  stock- 
holders to  an  amount  equal  to  their  stock.  As  a  security  for  gen- 
eral soundness  the  law  limited  the  indebtedness  of  any  branch 
beyond  its  circulation  and  deposits,  and  forbade  loans  upon  paper 
having  more  than  four  months  to  run.  It  forbade  any  branch  to 
issue  the  notes  of  any  other,  and  required  all  to  take  each  other's 
notes  at  par ;  but  it  permitted  the  circulation  of  notes  received  in 
payment  of  debts,  if  redeemable  in  gold  and  silver  and  received  in 
the  regular  course  of  business,  although  issued  by  banks  out  of 
the  state.  In  many  particulars  the  Iowa  law  followed  closely  pro- 
visions of  the  laws  of  Indiana  and  Ohio,  and,  as  in  those  cases,  the 
result  was  the  establishment  of  a  solid  institution  maintaining  its 
own  credit  and  strengthening  that  of  the  community  in  which  it 
was  established. 

So  strong  was  the  impression  made  by  the  group  of  state  banks 
on  what  we  may  call  the  Indiana  model,  that  in  1861  the  legisla- 
ture of  a  fourth  state,  Illinoi-s,  prepared  to  adopt  the  system,  hav- 
ing apparently  lost  all  hope  of  a  thorough  reform  of  the  free 
banks.     The   act   for   the  establishment  of   the    Union    Bank  of 


STATE   BANKS   IN   i860  329 

Illinois,  passed  February  20,  1861,  proposed  a  group  of  banks 
collected  around  a  central  board  with  mutual  responsibility  and 
with  strict  provision  for  specie  payment.  Many  of  its  sections 
were  taken  from  the  Indiana  statutes  with  little  change,  and  in 
general  promised  the  same  rigorous  and  prudent  management. 
It  failed,  however,  to  secure  a  majority  when  submitted  to  popular 
vote  in  November.  The  people  of  Illinois  at  that  juncture  felt 
a  reluctance,  perhaps  reasonable  under  the  circumstances,  to 
commit  themselves  further  on  the  subject  of  banking. 


THE   ESTABLISHMENT   OF   THE   NATIONAL   BANK- 
ING  SYSTEM  1 

The  plan  of  establishing  a  system  of  national  banks,  whose 
notes  should  take  the  place  of  those  issued  by  the  state  banks,  was 
first  presented  in  definite  shape  in  the  report  of  the  Secretary  of 
the  Treasury,  at  the  beginning  of  December,  1861.  Mr.  Chase 
started  in  his  discussion  of  the  subject  from  the  consideration 
that  by  some  process  the  advantage  of  issuing  a  paper  circulation, 
amounting  to  not  far  from  ^150,000,000  in  the  loyal  states,  ought 
to  be  transferred  from  the  issuing  banks  to  the  government,  and 
that  the  moment  was  opportune  for  such  a  change.  He  referred 
to  the  lack  of  system  in  the  existing  circulation,  the  insecurity  of 
the  bank-notes,  the  heavy  losses  suffered  by  the  public,  and  espe- 
cially to  the  recent  misfortunes  of  banks  in  the  Mississippi  Valley,^ 
to  enforce  upon  Congress  the  duty  of  protecting  the  public  from 
such  evils  in  the  future.  Two  methods  were  suggested  by  him, 
in  which  all  the  objects  aimed  at  in  the  proposed  reform  might 
be  attained,  —  first,  the  issue  of  United  States  notes  in  place  of 
bank-notes ;  and  second,  a  national  system  for  the  issue  of  bank- 
notes, to  be  redeemed  by  the  issuing  banks,  but  secured  by  the 
pledge  of  United  States  bonds.  The  plan  of  issuing  United 
States  notes  Mr.  Chase  rejected,  believing  that  its  possible  dis- 
asters far  outweighed  its  probable  benefits.  It  is  interesting  to 
observe,  in  view  of  what  soon  followed,  that  the  possible  disasters 
which  so  powerfully  affected  his  judgment  were,  the  issue  of  notes 
under  great  temptation  without  adequate  provision  for  redemption, 
the  risk  of  "  a  depreciated,  depreciating,  and  finally  worthless 
paper  money,"  and  "the  immeasurable  evils  of  dishonored  public 
faith  and  national  bankruptcy,"  all  then  being  "  possible  conse- 
quences of  the  adoption  of  a  system  of  government  circulation."^ 
Mr.  Chase  turned,  therefore,  in  accordance  no  doubt  with  some 

1  See  note,  p.  314,  above.  ^  JUd,^  p.  310.  ^  Finance  Report,  1861,  p.  18. 

330 


ESTABLISHMENT   OF  THE   NATIONAL  BANKING   SYSTEM      331 

predilections  as  well  as  with  logic,  to  the  second  plan,  a  secured 
national  bank  currency,  and  recommended  this  for  adoption  by 
Congress. 

A  bank  currency  thus  secured,  Mr.  Chase  was  careful  to  point 
out,  besides  its  advantages  of  uniformity  and  security,  would  also 
offer  the  further  advantage  of  a  large  demand  for  government 
securities  and  of  facilities  for  obtaining  the  loans  required  by  the 
war.  In  addition  it  would  strengthen  and  diffuse  the  interest  in 
preserving  the  Union,  by  making  the  government  stocks  the 
basis  for  the  circulation  in  general  use,  and  would  also  secure 
equality  of  value  for  the  paper  currency  in  every  part  of  the 
Union.  The  device  of  securing  bank-notes  by  a  pledge  of  public 
stocks  had  been  shown  to  be  practicable  and  useful  by  the  experi- 
ence of  New  York  and  of  some  other  states,  and  notes  issued  upon 
this  system  would  now  have  a  solid  basis,  in  the  large  amount  of 
specie  retained  in  the  United  States  by  the  requirement  that 
duties  on  imports  should  be  paid  in  coin.  To  these  considerations 
it  was  wisely  added  that  by  offering  inducements  to  existing  sol- 
vent institutions  to  adopt  the  national  system,  the  transition  from 
a  heterogeneous  and  unsafe  currency  to  one  which  should  be 
uniform  and  sound  could  be  effected  almost  imperceptibly  and 
the  evils  of  a  great  and  sudden  change  could  be  avoided. 

But  although  Mr.  Chase  believed  that  this  plan  might  be  per- 
fected and  passed  by  Congress  before  the  end  of  the  session  of 
1861-1862,  and  that  it  might  be  serviceable  in  obtaining  the  loans 
needed  for  the  current  year,  it  was  after  all  a  leisurely  expedient 
for  filling  the  treasury  of  a  country  in  the  throes  of  civil  war,  and 
events  were  already  moving  too  fast  for  his  calculations.  Although 
his  report  made  no  reference  to  any  immediate  pressure  on  the 
Treasury  and  no  suggestion  of  any  new  expedient  for  its  rapid 
replenishment,  the  suspension  of  specie  payment  had  already 
become  as  nearly  certain  as  any  future  event  can  be.  By  some  of 
the  bank  managers  suspension  had  been  contemplated  for  many 
weeks  as  the  probable  result  of  the  locking  up  of  their  resources 
in  government  bonds  and  the  gradual  dissipation  of  their  reserves 
by  payments  to  the  Treasury.  By  the  first  week  in  December  this 
double  process  was  so  far  advanced  and  the  public  disquiet  was  so 
great  as  to  leave  no  doubt  as  to  the  issue  in  the  minds  of  cool 
observers.     The  shock  to  credit  was  precipitated  by  a  sudden  alarm 


332  ESSAYS 

as  to  possible  war  with  England,  and  after  some  struggle  the  banks 
suspended  on  the  30th  of  December  —  earlier  than  they  might 
have  done  had  no  special  strain  come  upon  them,  but,  after  all, 
under  the  pressure  of  an  irresistible  movement,  of  which  the  cause 
was  to  be  found  in  the  policy  pursued  by  the  government  in  its 
dealings  with  them. 

As  a  consequence  of  the  suspension  of  specie  payments,  Mr. 
Chase  found  himself  confronted  by  the  demand  for  an  issue  of  gov- 
ernment notes,  as  a  ready  source  of  supply  for  the  Treasury,  before 
it  was  possible  for  him  to  draft  a  bill  for  a  bank  system.  Interest 
at  once  centred  upon  this  apparently  unexpected  demand,  and  the 
discussion  had  its  issue  in  the  first  legal-tender  act,  approved  Feb- 
ruary 25,  1862.  By  this  act  Congress,  with  a  recommendation 
reluctantly  given  by  the  Secretary,  adopted  the  expedient  rejected 
by  Mr.  Chase  in  his  report  of  December  9,  and  established  a  govern- 
ment currency,  giving  it,  moreover,  the  quality  of  legal  tender, 
which  was  probably  not  contemplated  by  him  as  possible,  or  as 
admissible  even  if  possible.  The  plan  of  a  bank  currency,  favored 
by  Mr.  Chase,  then  took  the  second  place,  and  was  finally  thrown 
over  to  the  next  session  of  Congress.^ 

It  was  pointed  out  at  the  time,  and  there  seems  to  have  been 
great  force  in  the  suggestion,  that  all  the  advantages  of  a  secured 
currency  could  be  gained  by  a  method  much  more  expeditious  than 
the  elaboration  of  a  complete  system  of  national  banks.  A  com- 
paratively simple  measure,  by  which  existing  banks  should  be 
required  to  secure  their  notes  by  the  pledge  of  United  States  bonds, 
to  be  placed  in  the  custody  of  the  Treasury,  would  have  made  their 
issues  uniform  and  safe,  and  would  have  made  them  large  perma- 
nent investors  in  government  bonds.  The  banks  of  the  three  cities, 
New  York,  Boston,  and  Philadelphia,  taken  by  themselves,  had  at 
the  date  of  the  suspension  of  payments  an  aggregate  capital  of 
^1,200,000,000,  and  against  their  liabilities  for  deposits  and  circula- 
tion amounting  to  ^181,600,000  held  a  specie  reserve  of  $44,000,- 
000,  or  twenty-four  per  cent.  The  issues  of  these  banks,  it  was 
pointed  out,  if  secured  by  bonds,  could  be  used  by  the  government 

^  A  bill  framed  by  E.  G.  Spaulding  and  Samuel  Hooper  was  introduced  on  July  il, 
read  twice,  and  referred  to  the  Committee  on  Ways  and  Means,  but  a  resolution  to  print 
6000  copies  was  laid  on  the  table  July  15,  and  the  bill  was  dropped.  —  Cong.  Globe, 
3258,  3293,  3362,  3370. 


ESTABLISHMENT    OF   THE    NATIONAL    BANKING    SYSTEM      333 

as  safely  as  its  own  notes  ;  the  banks  could  be  used  as  general 
depositories  by  the  Treasury  without  risk ;  the  inconveniences  of 
the  Independent  Treasury,  which  adjusted  itself  with  difficulty  to 
the  new  conditions  created  by  war,  could  be  avoided ;  and  the  sys- 
tem which  thus  embraced  the  banks  of  the  great  cities  could  include 
without  difficulty  any  bank  anywhere  that  was  strong  enough  to 
comply  with  the  terms  of  such  an  arrangement.  But  whatever  the 
financial  merits  of  such  an  improvised  national  circulation  may  have 
been,  it  was  not  politically  feasible.  The  existing  banking  interests 
were  not  then  agreed  as  to  the  larger  questions  involved  in  their 
relations  with  the  government ;  the  public  were  not  prepared  for  a 
revolution  in  the  policy  of  the  government  with  respect  to  banks; 
and  finally  the  Secretary  himself,  having  in  mind  the  comprehensive 
scheme  of  a  permanent  national  banking  system,  was  little  inclined 
to  adopt  a  measure  which,  falling  short  of  his  aim,  might  be  found 
ultimately  to  stand  in  his  way.  The  proposition  had  little  strength 
then  and  attracted  but  little  attention. 

When  Mr.  Chase  again  brought  forward  his  plan,^  at  the  begin- 
ning of  the  session  of  1862- 1863,  it  was  under  greatly  altered  con- 
ditions. Two  legal-tender  acts  had  been  passed,  giving  authority 
for  the  issue  of  $250,000,000  of  United  States  notes,  and  of  this 
amount  all  but  1^27,000,000  had  been  paid  out.  The  price  of  gold 
had  been  rising  through  the  year  and  now  stood  above  130,  and 
the  prices  of  merchandise  were  advancing.  It  was  estimated  by 
the  Secretary  that  the  banks  of  the  loyal  states  in  the  course  of 
twelve  months  had  increased  their  circulation  from  $130,000,000  to 
$167,000,000,  and  their  deposits  from  $205,000,000  to  $354,000,000, 
making  an  increase  of  liabilities  under  both  heads  of  about  thirty 
per  cent,  and  had  increased  their  investments  by  not  far  from 
$70,000,000.  With  great  ingenuity  of  reasoning  he  contended 
that  nearly  the  whole  increase  in  the  volume  of  the  currency  was 
"  legitimately  demanded  by  the  changed  condition  of  the  country," 
but  that  if  there  were  any  redundancy  it  was  due  to  the  issues  of 
the  banks  and  not  to  the  new  element  added  to  the  circulation 
by  the  government. 

In  this  state  of  things,  with  what  appeared  to  most  observers 
an  alarming  depreciation  well  under  way,  the  need  of  funds  for 
the  immediate  wants  of  the  Treasury  was  again  pressing.     The 

1  Finance  Report,  1S62,  p.  17. 


334  ESSAYS 

sale  of  the  bonds  authorized  by  the  legal-tender  acts  had  been 
trifling,  and  comparatively  little  was  to  be  counted  upon  from  that 
source.  Indeed,  Congress  had  blocked  the  way  to  any  important 
sales,  by  providing  that  the  bonds  should  be  sold  by  the  Treasury 
at  the  market  price  only,i  and  that  legal-tender  notes  should  be 
exchangeable  for  bonds  at  the  pleasure  of  the  holder,  thus  in  effect 
limiting  the  price  of  bonds  to  par,  and  leaving  purchasers  little 
chance  for  a  profit.  The  repeal  of  these  provisions  Mr.  Chase 
asked  for  and  secured  at  the  end  of  the  session,  together  with 
authority  for  borrowing  in  other  forms  to  a  vast  amount.  It  was 
not  by  his  advice,^  however,  that  Congress  at  the  same  time  made 
its  third  resort  to  an  issue  of  legal-tender  notes,  authorizing  an 
increase  of  the  active  legal-tender  currency  to  $400,000,000,  and 
the  issue  of  an  equal  amount  of  legal-tender  notes  in  other  forms. 
He  still  maintained  that  an  issue  of  government  notes  as  a  per- 
manent system  was  open  to  grave  objection,  and  that  if  it  were 
used  for  temporary  relief,  it  must  be  with  a  sparing  hand ;  and  he 
was  more  firmly  persuaded  than  ever  that  the  cure  for  the  increas- 
ing disorder  of  the  currency  must  be  found  in  the  resort  to  national 
bank-notes  as  the  substitute  for  all  other  paper  issues.  He  therefore 
pressed  upon  Congress  at  some  length  the  considerations  which 
weighed  with  him  in  favor  of  immediate  legislation  for  this 
purpose. 

A  comparison  of  the  reasons  urged  by  Mr.  Chase  in  1862 
with  those  briefly  indicated  by  him  in  1861  shows  little  change  in 
his  general  estimate  of  the  advantages  promised  by  a  permanent 
system  of  national  banking.  He  adds  in  1862  the  consideration 
that  under  such  a  system  the  banks  could  be  used  safely  as 
depositories  in  connection  with  the  Independent  Treasury,  with 
advantages  which  perhaps  experience  had  finally  led  him  to  rate 

1  Chase  construed  the  provision  of  the  statute  authorizing  the  sale  of  bonds  "  at 
the  market  value  thereof"  to  prevent  sales  below  the  current  New  York  quotations, 
though  in  Congress  the  view  was  expressed  that  market  rate  signified  whatever  price  the 
government  could  secure.  Chase  was  clearly  right,  for  otherwise  the  provision  in  question 
would  have  had  no  reason  for  its  insertion. 

^  As  in  the  case  of  the  earlier  legal-tender  acts,  Chase  readily  acquiesced  in  the 
views  of  the  majority  in  Congress.  In  January,  1863,  he  prepared  a  bill,  in  response  to  a 
ref|uest  from  the  Senate  Committee  on  Finance,  as  a  substitute  for  a  pending  measure 
authorizing  a  further  issue  of  greenbacks,  and  his  substitute  accepted  that  proposal, 
merely  adding  provisions  to  facilitate  the  sale  of  bonds.  —  Cong.  Globe,  p.  270. 


ESTABLISHMENT   OF   THE   NATIONAL   BANKING   SYSTEM      335 

more  highly  than  at  first.  He  also  declares  his  opinion  that  in 
no  way  can  the  ultimate  resumption  of  specie  payment  be  made  so 
certain  as  by  the  conversion  of  the  entire  paper  circulation  into 
an  issue  of  bank-notes,  secured  by  bonds  bearing  coin  interest. 
On  the  whole  the  suggested  advantages  of  the  sy.stem,  although 
substantial,  are  remote.  Even  the  direct  gain  expected  from  the 
absorption  of  bonds  by  the  banks  is  described  as  a  sale  amounting 
to  ^250,000,000  or  more  "  within  a  very  few  years,"  promising, 
however,  very  little  aid  during  the  current  year,  and  perhaps  not 
much  for  the  next.  In  this  part  of  his  recommendation,  Mr.  Chase, 
in  December,  1862,  was  looking  far  beyond  the  wants  of  the  mo- 
ment, to  the  time  when  the  legal-tender  notes,  after  serving  their 
temporary  purpose,  should  have  disappeared,  and  the  bank-notes 
should  have  become  the  sole  and  permanent  currency ;  and  so  far 
did  he  carry  his  forecast  of  the  future  in  this  respect  that  he  even 
took  note  of  the  probable  payment  of  the  national  debt,  and  the 
necessity  in  this  case  of  finding  some  new  basis  for  the  bank  circu- 
lation, "  But  these  considerations,"  he  said,  "  may  be  for  another 
generation." 

The  national  currency  bill,  which  by  the  strong  influence  of 
Mr.  Chase  and  his  supporters  was  passed  by  Congress  and  be- 
came a  law  February  25,  1863,^  was  framed  on  the  familiar  lines 
of  the  New  York  system,  with  details  perfected  by  comparison 
with  the  banking  systems  of  other  states.  It  prescribed  no  limit 
for  the  number  of  national  banking  associations,  but  fixed  the 
aggregate  of  notes  to  be  issued  by  them  at  $300,000,000.  Of  this 
aggregate  one-half  was  to  be  apportioned  among  the  states,  terri- 
tories, and  the  federal  district  in  proportion  to  population,  and 
one-half  to  have  due  regard  to  "  existing  banking  capital,  resources, 
and  business."  The  notes  were  to  be  issued  under  the  superin- 
tendence of  a  Comptroller  of  the  Currency,  to  be  secured  by 
interest-bearing  bonds  of  the  United  States,  and  to  be  redeemable 
in  "lawful  money,"  this  term  including  legal-tender  notes  as  well 
as  specie.  The  banks  were  not  required,  however,  to  redeem 
their  notes  anywhere  except  at  their  own  counters.  Provision  was 
made  for  the  organization  of  banking  associations  by  any  appli- 
cants who  should  comply  with  certain  conditions  named  in  the 
act,  and  also  for  the  conversion  of  state  banks  into  national  bank- 

1  12  "Statutes  at  Large,"  p.  665. 


336  ESSAYS 

ing  associations  upon  application  in  due  form.  By  a  provision 
inserted  upon  motion  of  a  Senator  from  New  York  and  but  little 
discussed,^  it  was  also  provided  that  any  state  bank,  holding 
United  States  bonds  to  the  extent  of  one-half  its  capital,  might, 
upon  transferring  the  bonds  to  the  Treasurer  of  the  United  States, 
be  authorized  to  issue  notes  to  the  amount  of  eighty  per  cent  of 
the  bonds  transferred,  the  notes  thus  issued  being  supplied  by  the 
Comptroller  of  the  Currency  and  payable  at  the  Treasury  in  case 
of  the  failure  of  the  issuing  bank,  in  the  same  manner  as  other 
notes  issued  under  the  act. 

This  bill  did  not  pass  without  difficulty.  In  the  Senate  the 
vote  upon  its  passage  was  23  yeas  to  21  nays  and  in  the  House 
78  yeas  to  64  nays.  These  votes  did  not  closely  represent  either 
political  or  sectional  divisions,  members  of  the  same  party  from 
the  same  state  being  in  some  cases  upon  opposite  sides.  The 
bill  had  to  encounter  objections  resting  upon  several  different 
grounds.  Not  only  was  it  opposed  by  some  for  political  reasons 
and  merely  as  a  measure  of  the  administration,  but  it  was  also 
viewed  with  great  distrust  by  others,  as  a  proposition  for  a  vast 
financial  consolidation,  incomparably  more  formidable  than  the 
former  Bank  of  the  United  States.  The  friends  of  the  state  banks 
eyed  it  with  special  jealousy,  believing  that  the  two  systems, 
national  and  local,  could  not  long  stand  side  by  side ;  and  in  this 
they  were  justified  by  the  avowed  purpose  of  Mr.  Chase,  and  by 
the  strong  language  of  some  of  his  adherents.  And  among  those 
who  might  not  have  been  averse  to  a  national  banking  system 
under  some  conditions,  there  was  doubt  and  apprehension  as  to  the 
opportuneness  and  the  details  of  this  particular  measure.  While 
the  bill  was  under  discussion.  Congress  was  maturing  the  third 
legal-tender  act,  and  the  premium  on  gold,  which  had  passed  thirty 
in  December,  was  rising  from  fifty  to  sixty,  passing  the  latter  point 
before  the  vote  on  the  bank  bill  was  taken  in  the  House.  The 
Secretary  had  seen  in  the  bill  a  means  for  prescribing  more  surely 
for  ultimate  specie  payment ;  but,  it  was  asked,  what  safe  reliance 
could  there  be  upon  a  system  under  which  solvency  meant  sim- 
ply payment  in  depreciating  paper  and  the  security  against 
insolvency  was  found  in  bonds  which  were  sinking  with  the 
paper.''     In  ordinary  times  the  bill  probably  could  not  have  made 

^  Cong.  Globe,  February,  1863,  p.  850. 


ESTABLISHMENT   OF   THE   NATIONAL   BANKING   SYSTEM      337 

its  way  against  these  various  elements  of  opposition  ;  but  no  incon- 
siderable part  of  its  strength  was  due  to  the  gloomy  circumstances 
of  the  winter  of  1862- 1863.  In  Congress  as  well  as  among  the 
people  at  large  the  resolution  to  stand  by  the  government  carried 
many  to  the  point  of  relinquishing  private  objections  to  a  measure 
declared  necessary  by  the  administration  ;  and  so  the  bank  bill 
gained  a  majority,  not  resting  altogether  upon  conviction. 

Capital  showed  but  little  alacrity  in  organizing  under  the  bank 
act  of  1863.  Seven  months  after  its  passage  only  66  banks,  with 
a  capital  of  little  over  $7,000,000,  had  begun  operations,  and  ten 
months  from  its  passage  only  139,  with  a  capital  of  $14,740,000, 
reported  to  the  Comptroller.  The  six  states,  Ohio,  Indiana,  Illinois, 
Michigan,  Iowa,  and  Wisconsin,  supplied  35  out  of  the  66  banks 
reporting  in  October,  1863,  and  79  out  of  the  139  reporting  in 
January,  1864.  At  the  latter  date  New  England  had  organized  but 
14  national  banks.  New  York  16,  and  Pennsylvania  20.  The 
Comptroller  of  the  Currency  regretted  the  opening  of  so  many  new 
banks  in  states  where  there  was  no  deficiency  of  banks  already.  In 
general,  in  the  first  year  under  the  new  act,  a  few  strong  banks  had 
been  established,  as  the  First  and  Second  National  Banks  of  New 
York,  the  First  of  Philadelphia,  the  First  of  Pittsburg,  the  First  of 
Cincinnati,  and  the  Plrst  of  Chicago ;  but  the  existing  banks  for  the 
most  part  held  aloof,  and  new  capital  came  in  but  sparingly.  The 
report  of  the  banks  in  the  beginning  of  April,  1864,  showed  an 
investment  by  them  in  United  States  bonds  of  but  $41,175,100. 
At  this  time,  however,  the  importance  of  the  new  system  as  a 
market  for  government  securities  had  pretty  well  disappeared. 
The  desire  of  the  administration,  expressed  on  every  occasion, 
was  that  the  great  mass  of  state  banks,  and  especially  the  strong 
institutions  in  the  older  states,  should  be  reorganized  as  national 
banks.  These  banks  had  already  become  large  holders  of  govern- 
ment obligations,  for  reasons  quite  unconnected  with  any  possible 
future  reorganization  under  the  national  system.  The  depression 
of  business  which  continued  through  the  years  1862  and  1863  had 
diminished  the  demand  for  regular  commercial  loans,  and  many 
banks  with  large  resources  at  command  found  it  difficult  to 
procure  the  usual  amount  of  business  proper.  Tempted  by  the  high 
rate  of  income  which  securities  bearing  gold  interest  began  to 
pay,  and    anxious  to   employ  their  funds,  banks   were   investing 


338  ESSAYS 

freely  in  bonds  of  the  United  States  and  also  in  one-year  certificates 
of  indebtedness  issued  by  the  Treasury.  In  November,  1863,  the 
banks  of  Massachusetts,  though  but  three  among  them  were 
national  banks,  owned  government  securities  to  the  amount  of  over 
$53,000,000;  and  the  banks  of  New  York,  city  and  country, 
probably  held  similar  investments  to  an  amount  not  far  below  their 
capital  of  $109,000,000.  These  holdings  were  unequally  distributed, 
no  doubt,  but  they  far  exceeded  in  the  aggregate  the  amount  of 
securities  which  the  banks  would  have  been  required  to  deposit 
under  the  national  bank  act,  so  that  the  absorption  of  the  exist- 
ing banks  by  the  national  system  then  promised  to  create  little 
additional  demand  for  bonds. 

The  interest  in  the  new  system  had  in  fact  been  concentrated 
entirely  upon  its  practical  merits  and  upon  the  expediency  of  substitut- 
ing it  for  the  state  system.  From  the  passage  of  the  act  of  1863 
the  Treasury  had  pursued  the  policy  of  actively  stimulating  the 
adoption  of  the  national  system.  By  a  fortunate  choice  Mr.  Hugh 
McCulloch,  president  of  the  Bank  of  the  State  of  Indiana,  had  been 
appointed  Comptroller  of  the  Currency, — a  gentleman  widely 
known  as  an  experienced  and  prudent  manager  and  a  strong 
advocate  of  a  sound  currency,  originally  opposed  to  the  passage  of 
the  act,  but  finally  convinced  of  its  expediency  and  the  wisdom 
of  its  leading  provisions.  It  was  characteristic  of  the  policy  of 
the  Treasury  as  administered  by  McCulloch,  that  while  the  conver- 
sion of  state  banks  into  national  was  urged  by  every  argument  and 
persuasion,  those  sections  of  the  bank  acts  which  allowed  the 
deposit  of  bonds  and  issue  of  notes  without  the  abandonment  of 
state  charters  remained  dormant.  The  Comptroller,  in  a  public 
circular,  discouraged  the  use  of  these  provisions,  and  although  he 
admitted  that  if  applications  were  made  he  "must  obey  the  law," 
it  is  probable  that  his  discouragement  was  in  every  case  as  emphatic 
as  he  found  necessary  for  complete  effect.  It  was  his  opinion 
that  the  state  systems  and  the  national  could  not  long  coexist ;  "  one 
or  the  other  will  fully  occupy  the  field,"  and  he  had  no  doubts 
which  would  and  should  be  the  survivor.  The  issue  was  made  up, 
then,  in  1863,  and  the  real  object  of  public  debate  was  hencefor- 
ward the  national  system,  its  merits,  and  its  general  adoption. 

The  year  1863  was  therefore  a  year  of  discussion,  fruitful  in 
pamphlets,  criticisms,  and  propositions  for  amending  the  act.     In 


ESTABLISHMENT   OF   THE   NATIONAL   BANKING   SYSTEM      339 

some  cases  writers,  representing  large  existing  interests,  showed 
a  deep  distrust  for  the  whole  scheme,  and  were  ready  to  see  state 
bank  issues  withdrawn  and  the  field  of  circulation  temporarily- 
occupied  by  Treasury  notes,  rather  than  embark  the  whole  banking 
capital  of  the  country  in  an  experiment.  On  all  sides  defects  in 
the  act  were  pointed  out  which  justified  the  reluctance  of  solid 
banks  to  take  out  new  charters  under  it.  It  was  urged  that  the 
redemption  of  bank-notes  at  convenient  centres  was  absolutely 
necessary  in  order  to  hold  individual  banks  to  any  responsibility 
whatever  and  as  a  safeguard  against  general  overissue.  Provision 
for  requiring  the  accumulation  of  surplus,  omitted  in  the  act  of 
1863,  was  called  for  to  insure*  the  strengthening  of  weak  banks. 
It  was  pointed  out  that  the  act  did  not  make  the  government 
responsible  for  the  safety  of  the  bonds  deposited  with  it,  and  that 
the  banks  were  therefore  called  upon  to  entrust  a  vast  amount  of 
securities  to  the  fidelity  of  agents  over  whom  they  had  no  control. 
The  act  had  authorized  the  Secretary  of  the  Treasury  to  employ 
national  banks  as  depositories  of  the  public  moneys  at  his  discre- 
tion, but  without  any  requirement  as  to  security ;  and  it  was 
urged  that  although  with  proper  provisions  of  this  kind  the  banks 
could  be  used  as  depositories  freely  and  the  proved  inconveniences 
and  evils  of  the  Independent  Treasury  greatly  mitigated,  any 
system  of  deposit  banks  without  such  provision  must  be  liable  to 
abuse  and  would  probably  be  found  dangerous.  The  act  had 
also  made  no  provision  for  the  voluntary  winding  up  of  banks,  so 
that  the  extrication  of  capital  from  an  unprofitable  business 
appeared  to  be  impossible.  In  much  that  was  written  in  that  year 
it  was  either  assumed  or  advised  that  the  provisions  for  the  issue 
of  secured  national  notes  by  state  banks,  contained  in  the  act  of 
1863,  should  be  retained  and  brought  into  use;  and  the  policy  of 
discouragement  pursued  by  the  Comptroller  of  the  Currency, 
already  referred  to,  did  not  escape  sharp  criticism.  There  was 
also  very  general  condemnation  of  the  practice  adopted  by  the 
Comptroller,  apparently  without  warrant  of  law,  of  requiring  all 
banks  reorganizing  under  the  national  act  to  give  up  their  dis- 
tinctive names  and  become  simply  the  First,  Twentieth,  or  Fortieth 
National  Bank  of  some  town  or  city,  as  might  happen.  The 
names  of  established  banks  represent  a  good  will  and  an  earned 
reputation  and  credit.     They  are  also  a  security  for  the  public, 


340  ESSAYS 

who  know  banks  by  name  for  good  or  ill,  but  cannot  have 
an  equal  familiarity  with  a  list  of  mere  numbers.  The  Comp- 
troller had  urged  as  a  reason  for  requiring  the  use  of  numbers 
instead  of  names  by  reorganized  banks  that  all  who  came  under 
the  system  had  an  interest  in  "  making  it  symmetrical  and  harmo- 
nious, as  well  as  national,"  but  it  was  difficult  to  believe  that  this 
was  all ;  and,  with  the  strong  objection  to  partial  loss  of  identity  felt 
by  the  banks,  there  was  also  a  certain  vague  impression  that 
something  more  than  met  the  eye  was  implied  in  the  proposition 
to  make  them  all  indistinguishable  members  of  a  vast  system  hav- 
ing its  centre  of  control  at  Washington. 

At  the  session  of  1 863-1 864  Congress  proceeded  to  revise  the 
whole  system  in  the  light  of  the  year's  experience.  A  bill  for  that 
purpose  was  reported  March  13,  1864,  and  from  that  time  the 
subject  was  before  Congress,  in  one  form  or  another,  until  the 
final  votes  of  the  two  Houses  on  May  31  perfected  the  measure, 
under  which  the  national  banking  system  was  at  last  fully  estab- 
lished.^  Many  of  the  suggestions  brought  forward  in  popular  dis- 
cussion had  been  adopted  by  the  Comptroller  and  recommended  in 
his  annual  report  at  the  beginning  of  the  session,  and  others  were 
adopted  by  Congress  upon  advice  received  from  other  sources. 
The  law  was  completely  recast.  The  provision  for  apportioning 
the  ^300,000,000  of  circulation  among  the  states  was  repealed ;  it 
was  provided  that  only  registered  bonds  should  be  deposited  as 
security,  and  that  the  property  of  the  banks  should  thus  be  made 
safe  while  in  the  hands  of  the  government ;  redemption  of  notes 
by  every  bank  in  some  reserve  city,  as  well  as  at  its  own  counter, 
was  provided  for ;  the  accumulation  of  a  surplus  equal  to  at  least 
one-fifth  of  the  capital  of  any  bank  was  required ;  provision  was 
made  for  requiring  full  security  from  banks  used  as  depositories  by 
the  Treasury ;  the  provisions  as  to  the  amount  of  capital  and  the 
terms  on  which  a  bank  could  begin  its  business  were  somewhat 
strengthened ;  and  in  short  the  whole  system  was  made  firmer  and 
more  harmonious.  Without  entering  into  the  details  of  the  legisla- 
tion, it  is  enough  to  say  that  in  the  act  of  June  3,  1864,  the  na- 
tional banking  system  took  the  form  which  in  essentials  it  still 
retains. 

In  its  provisions  with  respect   to  the  state  banks  the  act  of 

^  13  "  Statutes  at  Large,"  p.  95. 


ESTABLISHMENT   OF   THE   NATIONAL   BANKING   SYSTEM      341 

1864  made  two  significant  changes.  It  provided  expressly  that 
state  banks  reorganizing  under  the  national  system  might  come  in 
under  their  former  names  and  without  change  in  the  amount  of 
their  shares.  Special  provision  was  even  made  for  the  exemption 
of  stockholders  from  personal  liability,  under  conditions  intended  to 
meet  the  case  of  the  Bank  of  Commerce  of  New  York  and  in  fact 
applicable  to  no  other.^  The  sections,  however,  which  allowed  the 
issue  of  secured  national  currency  to  state  banks  were  omitted  in 
the  revised  act,  and  thus  Congress  planted  itself  finally  on  the 
ground  of  an  exclusively  national  system,  and  invited  the  adhesion 
of  all  existing  banks,  but  rejected  any  connection  short  of  complete 
responsibility  to  national  authority.  No  special  taxation  was  pre- 
scribed for  the  purpose  of  compelling  the  adhesion  of  distrustful 
or  reluctant  banks,  but  the  language  used  by  the  advocates  of  the 
new  law  left  little  room  for  doubt  that  such  measures  would  follow. 
For  the  present  it  was  enough  that  the  current  of  public  opinion 
was  setting  in  favor  of  the  national  system,  and  that  many  who  had 
once  opposed  it  now  accepted  the  settled  policy  of  the  government, 
and  withdrew  their  opposition. 

The  hesitation  of  the  state  banks  as  to  reorganizing  under  the 
national  system  began  to  give  way  in  the  summer  of  1864.  The 
discussion  of  the  system  in  Congress  and  the  adoption  of  the  amended 
act  removed  many  special  objections  to  the  law,  and  made  it  cer- 
tain that  final  acquiescence  would  be  the  only  condition  on  which 
the  right  of  issue  could  be  enjoyed.  The  financial  strain  of  the 
war  and  the  depreciation  of  the  currency,  shown  by  the  price  of 
gold,  which  fluctuated  violently  between  200  and  285,  had  put  an 
end  to  all  probability  of  an  early  recovery,  and  made  a  long  de- 
pendence on  legal-tender  paper  of  uncertain  value  altogether 
likely.  To  adjust  themselves  to  the  present  state  of  things  began 
then  to  be  thought  wise  by  many  who  had  hitherto  maintained  a 
merely  expectant  attitude.  The  announcements  of  intention  to 
reorganize  began  to  be  frequent  in  June  and  July.  At  the  close 
of  November  the  Comptroller  reported  that  584  national  banks 
were  in  existence,  of  which  probably  about  one-third  were  reorgan- 
ized state  banks ;  and  he  was  able  to  say  that  of  the  last  100 
banks  organized,  6y  were  state  banks,  that   nearly  all  the  bank- 

1  This  exemption  applied  to  existing  state  banks  having  a  capital  of  not  less  than 
^5,000,000  and  a  surplus  of  twenty  per  cent. 


342  ESSAYS 

ing  capital  of  Philadelphia  had  then  been  reorganized,  and  that 
of  the  numerous  apphcations  then  coming  in  most  were  for  the 
conversion  of  old  banks.  It  was  noticeable,  however,  that  at 
that  time  only  one  of  the  banks  in  New  York  City  had  reorganized, 
although  several  new  banks  had  been  established  under  the 
national  system.  Indeed,  the  Comptroller  was  plainly  embar- 
rassed by  the  hostile  influence  of  the  banks  in  New  York ;  for 
after  noticing  the  fear  of  some  that  the  national  banks  might 
reproduce  the  evils  of  the  weaker  state  banks,  he  remarked  in 
thinly  veiled  language  that  these  apprehensions,  entertained  "  or 
professed  to  be  entertained  by  the  bankers  of  a  state,  in  which  a 
system  similar  in  some  of  its  main  features  was  in  practical  opera- 
tion, intimidated  for  a  time  the  capitalists  of  other  states,  and 
retarded  the  reorganization  of  state  banks."  A  group  of  New  York 
banks,  however,  took  steps  looking  in  the  direction  of  reorganiza- 
tion in  December;^  by  the  end  of  that  month  21  of  the  Boston 
banks  had  reorganized,  and  the  stream  of  applications  soon  be- 
came so  strong  that  nearly  500  banks  were  chartered  in  the  five 
months  from  December  i,  1864,  a  large  proportion  of  them  being 
state  banks  reorganized.  The  change  from  the  old  system  to 
the  new  went  on  throughout  the  year  1865,  and  at  the  close 
of  December  was  nearly  complete,  1582  banks  then  reporting 
to  the  Comptroller,  of  which  more  than  900  were  formerly  state 
banks. 

Several  influences  had  expedited  this  change.  In  the  states 
having  a  large  amount  of  bank  capital,  enabling  acts  had  been 
passed  in  many  cases,  authorizing  incorporated  banks  to  exchange 
their  state  charters  for  those  of  the  United  States  without  disso- 
lution or  winding  up,  thus  preventing  the  expense,  interruption  to 
business,  and  loss  incident  to  the  collection  and  distribution  of 
assets  which  would  otherwise  have  been  necessary  upon  the  cessa- 
tion of  corporate  existence  under  state  laws,  and  making  the  reor- 
ganization a  merely  formal  proceeding  which  left  the  identity  of 
a  bank  unchanged.     Acts  of  this  sort  were  adopted  in  1863  and 

1  The  Fourth  National,  the  first  bank  with  large  capital  to  be  organized  in  New 
York  under  the  national  system,  was  due  to  the  influence  of  Jay  Cooke  ;  and  the  fear  of 
the  formation  by  him  of  a  bank  with  a  capital  of  ^50,000,000  is  said  by  Mr.  Cooke  to 
have  been  a  factor  in  the  change  of  policy  of  the  other  banks.  See  "  A  Decade  of 
American  Finance,"  North  American  Review,  November,  1902. —  Editor's  Note. 


ESTABLISHMENT   OF   THE   NATIONAL   BANKING   SYSTEM      343 

1864  by  Massachusetts,  Connecticut,  and  Pennsylvania,  and  early 
in  1865  by  Maine,  Rhode  Island,  New  York,  New  Jersey,  Mary- 
land, and  Indiana,  In  some  states,  also,  as  in  Massachusetts,  the 
neglect  or  disinclination  of  the  legislature  to  repeal  the  special  tax 
laid  by  the  state  upon  its  banks  had  a  serious  effect  in  turning 
the  scale  in  favor  of  change. 

Far  more  important,  however,  was  the  influence  exerted  by  the 
belief  that  Congress  would  take  steps  to  drive  from  the  field  all 
notes  issued  by  state  banks,  and  the  passage  of  a  measure  for  this 
purpose,  to  take  full  effect  in  1866.  The  Comptroller  of  the 
Currency,  in  the  first  year  of  the  new  system,  had  refrained  from 
advising  any  such  action,  but  in  his  report  of  1864  he  clearly 
expressed  the  opinion  that  the  time  had  come  for  Congress  to 
compel  the  withdrawal  of  all  state  issues. 

When  the  bill  amending  the  internal  revenue  act  came 
before  the  House  at  the  session  of  1 864-1 865  this  subject 
was  discussed  in  a  somewhat  desultory  manner,  and  opinion 
was  found  to  be  evenly  divided,  but  the  House  finally,  on  February 
18,  by  a  vote  of  68  to  ^y,  inserted  in  the  bill  a  section  im- 
posing a  tax  of  ten  per  cent  on  all  state  bank  notes  paid  out 
by  any  national  or  state  bank  after  January  i,  1866.^  The  bill 
then  went  to  the  Senate,  and  on  March  i  a  motion  to  strike 
out  this  section  was  refused  by  a  vote  of  20  to  22.  On  the  next 
day  the  section  was  amended  by  substituting  July  i  for  January  i 
as  the  date  when  the  tax  should  take  effect,  and  a  motion  to 
strike  out  was  then  refused,  17  to  21.  This  amendment  was 
assented  to  by  the  House  upon  the  report  of  a  committee  of  con- 
ference, and  the  section  accordingly  became  a  part  of  the  internal 
revenue  amendment  act,  approved  March  3,  1865,  It  was  looked 
upon  by  all  parties  as  the  natural  sequel  of  the  national  bank  acts, 
delayed  by  doubt  or  policy  for  a  time,  but  in  fact  a  vital  part  of 
the  scheme.  It  suppressed  the  state  bank  notes  by  destroying  the 
profit  of  issue,  but  it  avoided  the  severity  of  some  propositions  for 
the  same  object,  which  would  have  taxed  outstanding  circulation, 
or  would  have  taken  effect  earlier ;  and  this  degree  of  moderation 
was  apparently  necessary  for  the  success  of  the  measure  in  either 
House.  Adopted  at  a  moment  when  the  establishment  of  the 
national  system  was  well  advanced,  the  section  stood  as  a  threat 

^  13  "  Statutes  at  Large,"  p,  484, 


344  ESSAYS 

for  the  next  sixteen  months ;  and  when  at  last  it  took  effect,  the 
state  bank  issues  were  rapidly  disappearing. 

There  is  no  doubt  also  that  the  high  premium  on  gold  from 
the  spring  of  1864  to  the  spring  of  1865  had  an  important  influ- 
ence in  bringing  many  banks  to  an  immediate  decision  of  the  ques- 
tion of  reorganization.  When  the  suspension  of  specie  payments 
took  place,  the  banks  in  twenty-two  loyal  states,  excluding  those 
on  the  Pacific  coast,  held  not  far  from  $76,000,000  in  specie,  of 
which  the  banks  of  Boston,  New  York,  and  Philadelphia  held 
$33,000,000.  During  the  year  1862  the  holdings  for  all  the  states 
referred  to  were  above  $81,000,000,  and  the  banks  in  the  three 
cities  at  the  end  of  the  year  had  a  specie  reserve  of  $48,000,000. 
The  high  rates  for  gold  which  prevailed  throughout  1863  tempted 
many  banks  to  sell  their  coin,  and  probably  caused  a  considerable 
redistribution  of  that  which  remained;  but  in  January,  1864,  the 
banks  in  the  three  cities  still  held  $37,000,000.  Gold  was  then  quoted 
at  one  hundred  and  fifty-one,  but  it  soon  began  to  advance  rapidly. 
On  the  2 1st  of  June  it  passed  two  hundred,  and  with  violent  fluctu- 
ations remained  above  this  point  for  most  of  the  time  until  March, 
1865.  There  was  plainly  a  strong  inducement  for  banks  holding 
large  stocks  of  gold  but  carrying  on  their  business  upon  the  paper 
basis,  obliged  to  receive  legal-tender  notes  in  all  payments,  and 
not  bound  to  make  payment  in  any  other  medium,  to  sell  their 
specie  for  legal  tender  at  these  high  rates.  So  long  as  any  need  of 
preparation  for  eventual  specie  payments  had  been  felt  to  exist,  or 
so  long  as  further  advance  in  the  premium  on  gold  was  looked  for, 
the  specie  might  well  be  held;  but  as  affairs  stood  in  the  summer 
of  1864  it  is  not  surprising  that  the  disposition  to  collect  the  profit 
to  be  made  by  the  sale  of  gold  began  to  strengthen. 

Not  a  few  of  the  more  conservative  managers  of  the  banks 
saw  with  regret  this  tendency  to  place  the  whole  business  of 
banking  upon  the  paper  basis  and  were  reluctant  to  admit  that 
all  the  responsibility  for  facilitating  an  ultimate  return  to  the 
specie  standard  could  be  thrown  upon  the  government.  From 
several  quarters  the  proposition  was  made  that  the  national  banks 
should  be  required  to  accumulate  as  a  specie  reserve  some  part 
of  the  coin  interest  received  by  them  on  the  bonds  deposited  to 
secure  their  notes.  The  New  York  Clearing-house  banks  pro- 
posed a  small  accumulation  of  this  kind,  which  was  rejected  by 


ESTABLISHMENT   OF  THE   NATIONAL   BANKING   SYSTEM      345 

the  House  without  a  count.  In  the  Senate,  Mr.  Collamer  of 
Vermont  proposed  that  one-half  of  the  coin  interest  should  be 
added  by  the  banks  to  their  reserves  until  the  entire  reserve 
required  by  law  should  consist  of  coin.  Amended  so  as  to  require 
but  one-fourth  of  the  coin  interest  to  be  so  retained,  Mr.  Col- 
lamer's  proposition  was  rejected  by  a  vote  of  15  to  20;  and  thus 
the  amended  law  of  1864  went  into  effect  in  a  form  which  com- 
pletely ignored  the  question  of  providing  for  a  return  to  specie. 
The  banks  sold  their  gold  freely  as  a  preparation  for  reorganizing 
under  the  national  system,  and  the  gold  thus  released  swelled  the 
strong  current  of  exported  metal,  forced  out  of  the  country  by  the 
paper  currency  in  the  years  1864,  1865,  and  1866.  By  July,  1865, 
the  specie  held  by  the  banks  in  the  three  cities,  Boston,  New 
York,  and  Philadelphia,  had  sunk  to  ^20,000,000,  and  by  January, 
1866,  the  aggregate  of  specie  held  by  the  1582  national  banks  of  the 
United  States  was  under  $20,000,000,  and  so  far  as  shown  by  the 
quarterly  reports  it  remained  below  this  point  until  1868.  In  some 
cases  the  profit  reaped  by  the  banks  from  the  sale  of  their  specie, 
with  other  undivided  profits  already  in  hand,  was  paid  out  as  an 
extra  dividend  to  stockholders  upon  the  surrender  of  the  state 
charters ;  in  others  it  was  used  as  the  foundation  for  the  surplus 
which  national  banks  were  required  to  accumulate  to  the  extent 
of  one-fifth  of  their  capital,  or  was  added  to  surplus  funds  already 
held ;  and  in  others  still  the  opportunity  was  taken  to  increase 
capital  by  making  stock  dividends. 


THE   CIRCULATION    OF   THE   NATIONAL   BANKS, 

1865-1900^ 

The  effects  of  the  rapid  conversion  of  state  banks  into  national 
were  visible  for  many  years,  in  the  unequal  distribution  of  capital 
under  the  national  system  between  the  several  states  and  sections. 
The  amended  bank  act  of  1864  repealed  the  provision  for  ap- 
portioning the  $30o,ooo,ocxD  of  bank  circulation  among  the  states, 
and  early  in  1865  it  began  to  be  seen  that,  by  the  conversion  en 
masse  of  the  banks  in  states  well  provided  with  banking  capital, 
the  limit  of  aggregate  circulation  was  likely  to  be  reached  so 
soon,  as  to  leave  little  opportunity  for  the  enjoyment  of  the 
right  of  issue  in  states  where  the  number  of  banks  already 
organized  was  small.  By  a  mistake  of  administration,  an  effort 
made  by  Congress  to  provide  for  this  possibility  only  hastened 
the  absorption  of  the  right  of  circulation  by  the  states  which 
could  most  easily  make  use  of  it  at  short  notice.  A  clause 
in  the  act  of  March  3,  1865,  for  amending  the  bank  act,  re- 
vived the  provision  by  which  circulation  should  be  allotted  to 
banks  in  the  several  states,  one-half  according  to  population 
and  one-half  according  to  existing  banking  capital,  resources,  and 
business.'-^  In  the  internal  revenue  amendment  act  of  the  same 
date,  however,  a  section  was  inserted  providing  that  any  state 
bank  having  a  capital  of  $75,00x3  or  more,  applying  before  the 
first  day  of  July,  1865,  for  authority  to  become  a  national  bank 
and  found  to  be  in  good  credit,  should  receive  such  authority  in 
preference  to  new  banks  applying  for  the  same.^  It  was  clearly 
possible  to  interpret  the  two  provisions  so  as  to  give  effect  to 
both,  by  simply  giving  the  banks  already  existing  in  any  state 
the  preference  in  allotting  the  circulation  apportioned  to  that 
state ;  and  the  two  acts  being  of  even  date  and  neither  provision 
purporting  to  limit  or  control  the  other,  it  was  plainly  the  duty 
of  the  treasury  authorities  to  execute  both. 

1  See  note,  p.  314  above.  2  j-^  «  statutes  at  Large,"  p.  498.         ^  I/>id.,  p.  469. 

346 


THE   CIRCULATION   OF  THE   NATIONAL   BANKS  347 

Mr.  Clarke,  the  Comptroller  of  the  Currency,  however,  with  the 
approval  of  Mr.  McCulloch,  who  had  then  become  Secretary  of 
the  Treasury,  adopted  a  course  which  rendered  the  provision  for 
apportionment  entirely  nugatory.  Starting  from  the  correct 
assumption,  that  it  was  the  purpose  of  Congress  as  well  as  of  the 
administration  to  effect  the  general  conversion  of  the  state  banks, 
the  comptroller  proceeded  to  give  to  existing  banks  coming  under 
the  national  system  authority  for  the  issue  of  currency,  as  fast  as 
they  applied,  without  regard  to  the  provision  of  law  limiting  the 
amount  to  be  allowed  to  any  one  state.  The  states,  which  already 
had  much  banking  capital  and  were  ready  to  move  at  once,  had 
therefore  the  good  fortune  to  see  their  banks  easily  provided  with 
the  right  of  issue,  while  the  states  which  came  later,  or  which  had 
to  organize  new  banks,  soon  found  the  aggregate  so  far  filled  up  as 
to  leave  little  or  no  room  for  them.  The  fact  that  the  preference 
allowed  to  existing  banks  was  confined  to  such  banks  as  should 
apply  before  July  i  hastened  the  applications,  and  therefore  some 
time  before  that  date  was  reached  the  elaborate  apportionment  of 
circulation  contemplated  by  Congress  had  been  buried  beyond  the 
possibility  of  resurrection. ^  As  early  as  June  10,  1865,  more  than 
^250,000,000  out  of  the  aggregate  of  1^300,000,000  had  been  author- 
ized. Massachusetts,  Rhode  Island,  and  Connecticut,  where  the 
existing  banks  had  gone  over  to  the  national  system  almost  in  a 
body,  were  entitled  under  the  legal  apportionment  to  less  than 
$34,000,000,  but  had  received  authority  for  $85,000,000.  New 
York,  New  Jersey,  Pennsylvania,  and  Ohio  had  more  than  filled 
their  legal  quotas  ;  the  West  and  Northwest,  Indiana  and  Minnesota 
excepted,  generally  were  still  short  of  theirs ;  and  the  states  in 
the  South  and  the  states  and  territories  west  of  the  Missouri  en- 
titled to  nearly  $100,000,000  had  received  authority  for  only  about 
$5,000,000,  of  which  nearly  three-fourths  was  in  Kentucky  and 
Missouri.^  From  the  22d  of  May,  banks  in  New  York,  Philadel- 
phia, Providence,  Boston,  and  Hartford,  applying  for  conversion, 
were  called  upon  to  waive  their  rights  to  ask  for  currency  in  excess 
of  one-third  of  their  capitals ;  but  it  was  then  too  late  to  do  much 

^  In  a  debate  in  the  Senate,  a  few  years  later,  Mr.  Sherman  declared  "  that  this 
whole  difficulty  grew  out  of  a  disregard  of  the  law  ;  that  it  was  not  the  defect  of  the 
law,  but  a  violation  of  the  law." —  Cong.  Globe,  January  24,  1870,  p.  699. 

2  Bankers'  Magazine,  July,  1865,  p.  54. 


Quota  if 

Amount 

apportioned 

issued 

In  millions 

In  millions 

$45-7 

$103.5 

94-9 

124.2 

28.3 

30-7 

37-7 

18.9 

22. 

3-6 

66.2 

6.9 

348  ESSAYS 

more  than  take  precautions  against  overrunning  the  aggregate  of 
$300,000,000.  Apparently  not  all  of  the  circulation,  applied  for 
and  at  first  allotted  in  these  hasty  proceedings,  was  actually  issued ; 
but  a  startling  result  showed  itself  in  October,  1866,  when  $292,- 
673,000  of  notes  had  finally  been  given  out  for  circulation.  The 
allotment  between  certain  groups  of  states  then  stood  as  follows  i^  — 


Of  states  having  an  excess  : 

Six  New  England 

Five  Middle         .... 

Ohio,  Indiana,  Minnesota   . 
Of  states  deficient : 

Six  Western        .... 

Kentucky,  Tennessee,  Arkansas  . 

Nine  Southern,  Atlantic,  and  Gulf 

It  is  probable  that  in  this  remarkable  disregard  of  the  rule  of 
apportionment  laid  down  by  Congress,  both  the  Secretary  of  the 
Treasury  and  the  Comptroller  of  the  Currency  were  taken  by  sur- 
prise by  the  extent  and  rapidity  of  the  movement  for  the  conversion 
of  state  banks,  and  that  they  also  had  a  mistaken  belief  that,  after 
all,  the  resulting  disproportion  would  not  be  of  long  duration.  The 
fact  already  noticed,  that  a  large  number  of  the  Eastern  banks 
applying  to  be  admitted  as  national  banks  late  in  May,  1865,  were 
induced  to  agree  to  a  reduction  in  the  amount  of  circulation  which 
they  could  claim,  indicated  that  the  demand  for  the  right  of  circu- 
lation by  the  Eastern  and  Middle  states  had  gone  beyond  the 
amount  which  could  be  readily  used.  For  several  reasons,  more- 
over, the  authorities  at  the  Treasury  may  have  underrated  the  real 
importance  of  the  inequality  which  they  were  sanctioning.  It  was 
the  opinion  of  the  Comptroller  that  the  establishment  of  an  effec- 
tive system  of  central  redemption  for  national  bank-notes  would 
materially  curtail  the  issue,  and  would  destroy  the  interest  of 
many  banks  in  keeping  up  a  large  circulation.^     An  active  move- 

1  The  quota  for  every  state,  if  ^300,000,000  of  circulation  had  been  apportioned 
according  to  the  act  of  Congress,  is  shown  in  7  Home  Exec.  Doc.  No.  33  of  1865-1866. 
The  amount  issued  to  banks  up  to  October  i,  1866,  in  the  aggregate,  ;?292,673,ooo,  is 
given  for  every  state  in  the  Cojnptroller' s  Report  for  that  year,  p.  66. 

2  See  Comptroller's  Report  for  1865,  p.  6  ;  and  also  a  letter  by  the  Comptroller, 
dated  July  15,  1865,  in  the  Bankers'  Magazine  for  September,  1865,  p.  205.     Mr.  Hurl- 


THE   CIRCULATION   OF   THE   NATIONAL   BANKS  349 

merit  was  then  in  progress  for  establishing  such  a  system,  and  for 
maintaining  assorting  houses  in  New  York,  Boston,  and  Phila- 
delphia, from  which  all  notes  of  banks  not  providing  for  the  par 
redemption  of  their  notes  in  one  of  these  three  cities  should  be 
promptly  sent  home  for  payment.^  The  general  principle  of  this 
scheme  appears  to  have  been  sanctioned  by  the  Secretary,  and  the 
expectation  of  some  such  action  was  assigned  by  the  Comptroller 
as  a  ground  on  which  some  banks,  unable  to  secure  any  part  by 
the  right  of  issue,  might  hope  to  obtain  a  share  at  a  future  time. 
The  effect  of  a  system  of  real  redemption  in  sending  home  the 
notes  of  any  bank  after  a  brief  currency,  may  therefore  very  well 
have  been  counted  upon  as  a  probable  discouragement  of  weak 
banks,  and  as  likely  to  make  the  original  allotment  of  the  right  of 
issue,  in  part  at  least,  merely  provisional. 

It  must  also  be  borne  in  mind  that  in  the  spring  and  summer  of 
1865,  the  expectation  of  an  early  movement  toward  specie  pay- 
ment was  general.  The  Secretary  of  the  Treasury  was  strongly 
in  favor  of  such  a  movement,  and  in  his  report  in  December  even 
fixed  upon  January  i,  1868,  as  the  date  at  which  he  believed  redemp- 
tion practicable.^  Although  in  the  winter  of  1 865-1 866  he  had 
the  mortification  of  seeing  developed  in  Congress  a  serious  opposi- 
tion to  his  efforts  in  this  direction,  and  was  forced  to  submit  to  a 
jealous  limitation  of  the  powers  which  he  thought  necessary  for 
his  purpose,  still,  for  many  months  after  the  close  of  the  war  in 
April,  1865,  he  was  strong  with  the  public  and  confident  in  his 
policy,  and  he  even  appeared  to  have  the  support  of  Congress 
when  it  met  in  December.  With  the  expectation  then  that  specie 
payments  were  not  far  distant,  he  may  easily  have  believed  that 
the  bank  circulation  would  soon  right  itself  by  the  disappearance 
of  all  provisions  for  any  limit  of  the  total  amount  of  bank-notes. 
The  national  bank  act  was  so  drawn  as  to  adapt  itself  in  all  other 
respects  to  the  state  of  things  in  which  coin  should  become  the 
only  legal  tender,  and  Mr.  McCulloch  therefore  not  improbably 
believed  that  free  banking  would  soon  supersede  the  embarrassing 

burd,  who  was  Deputy  Comptroller  in  1865,  and  afterwards  Comptroller,  urged  the  im- 
portance of  the  central  redemption  and  its  restrictive  influence  in  all  his  reports  from 
1866  to  1870. 

^  For  the  action  of  the  banks  of  the  three  cities  on  this  subject,  and  for  a  letter  by 
Mr.  McCulloch,  see  Bankers'  Magazine,  1865-1866,  pp.  193,  401,  415. 

2  See  Finance  Report,  1865,  p.  36. 


350  ESSAYS 

provisions  of  the  existing  act.  Entertaining  such  a  belief,  he  was 
not  by  nature  the  man  to  be  strict  as  to  the  precise  terms  of  the 
authority  upon  which  his  powers  rested.  It  may  also  have  been 
thought  that  the  agricultural  states  of  the  South  and  West  would 
not  be  able  to  use  their  quota  of  circulation  without  a  good  deal  of 
delay,  and  the  relief  of  resumption  would  be  early  enough  to  meet 
their  needs.  Considerations  of  this  nature  were  no  doubt  strength- 
ened by  the  fact  that  to  limit  the  circulation  of  banks  in  the  East- 
ern and  Middle  states  to  the  proportion  required  by  Congress  would 
have  caused  a  heavy  reduction  of  the  bank  circulation  enjoyed  by 
those  states  for  many  years  under  the  system  of  state  banks. 

The  attainment  of  the  limit  of  aggregate  circulation  instantly 
checked  the  growth  of  the  national  banking  system,  as  regards  the 
number  and  capital  of  the  banks  organized.  1644  national  banks 
reported  to  the  Comptroller  October  i,  1866;  the  number  rose 
slightly  the  next  quarter,  and  then  fell  off,  became  stationary,  and 
at  last  declined,  until  in  October,  1870,  it  was  161 5,  sixty  banks  hav- 
ing in  the  meantime  gone  into  voluntary  liquidation.  The  capital 
of  the  banks  rose  from  ^415,050,000  to  the  neighborhood  of 
^420,000,000,  where  it  stood  until  near  the  middle  of  1 869.  These 
figures  sufficiently  show  the  restraint  upon  the  organization  of  new 
banks,  at  a  time  when  dividends  averaging  ten  per  cent  and  a  con- 
siderable increase  of  surplus  showed  that  the  banks  organized 
under  the  system  were  in  the  main  prosperous.  But  this  restraint 
was  felt  in  different  parts  of  the  country  in  very  unequal  degrees. 
In  the  Eastern  and  Middle  states,  although  the  wealth  and  activity 
of  the  community  gave  them  a  wide  field  for  the  employment  of 
banking  capital,  the  large  share  of  circulation  which  they  had  ob- 
tained under  the  national  act  gave  them  a  provision  adequate  to 
their  needs  for  several  years.  The  greater  density  of  their  popu- 
lation, moreover,  would  have  made  it  easier  for  them  in  any  case 
to  supply  deficiencies  by  banks  of  deposit  and  discount  under 
state  laws  or  by  trust  companies,  the  convenience  of  which  for 
some  banking  purposes  was  then  beginning  to  be  understood. 
But  in  the  West  and  Northwest  the  condition  of  things  was  far 
different.  Those  sections  felt  the  keen  stimulus  to  enterprise 
which  the  restoration  of  peace  had  brought  with  it.  Their  popu- 
lations were  once  more  rapidly  increasing  by  immigration  ;  their 
railway  systems  were    opening    up    new  territories  with    feverish 


THE   CIRCULATION   OF   THE   NATIONAL  BANKS  351 

haste ;  and  there  was  every  presage  of  a  period  of  wonderful 
growth.  But  the  increase  of  banking  which  should  normally 
attend  and  foster  this  development  was  practically  impossible. 
For  the  multiplication  of  banks  of  issue  there  was  no  room  under 
the  national  system,  and  mere  banks  of  deposit  and  discount 
under  that  system  neither  answered  the  needs  of  the  community, 
nor  presented  attractions  to  capital.  In  the  group  of  Western 
states  already  noticed  as  deficient  in  bank  circulation  in  October, 
1866,  there  was,  therefore,  a  gain  of  only  three  national  banks  in 
the  next  four  years.  The  gain  in  circulation  in  the  same  states 
was  for  the  same  period  only  $5,000,000,  in  spite  of  the  most 
ingenious  and  sometimes  costly  efforts  to  secure  the  rights  sur- 
rendered by  banks  going  into  liquidation  or  contracting  their 
business.^ 

With  the  central  Southern  states  and  those  of  the  Southern 
Atlantic  and  Gulf  group,  the  case  was  even  worse.  Many  of  those 
states  had  been  devastated  by  the  war  and  all  of  them  had  suffered 
heavy  losses  of  property.  Their  social  and  industrial  systems  had 
been  overturned  and,  with  everything  to  be  reconstructed,  they 
were  harassed  by  misfortune,  political  as  well  as  economic.  In 
any  case,  they  must  have  been  slow  in  rebuilding  their  banks  and 
probably  dependent  in  good  degree  upon  the  reluctant  aid  of  out- 
side capital.  It  is  doubtful  whether,  if  entire  freedom  of  organiza- 
tion had  then  existed,  the  South  could  in  those  years  have  done 
much  toward  the  extension  of  its  banking  upon  any  sound  basis. 
Before  this  could  be  accomplished  time  was  needed,  not  only  to 
repair  the  losses  of  the  war,  but  to  secure  political  peace  and  con- 
fidence in  the  future,  and  to  enable  the  South,  moreover,  to  regain 
possession  of  its  own  state  governments.  There  is  little  question, 
however,  that  the  process  of  financial  reconstruction  was  made 
slower  and  more  difficult  by  the  impossibility  of  securing  any  rea- 
sonable share  of  the  right  of  issue.     In  the  four  years  from  Octo- 

1  Mr.  Sherman  asserted  in  the  Senate  in  June,  1868,  that  "  there  are  banks  in  exist- 
ence in  the  Western  states  that  have  paid  from  ten  to  forty  thousand  dollars  in  New 
England  and  New  York  for  the  privilege  of  starting  banks  whenever  banks  there  have 
failed."  Mr.  Pomeroy  added  that  "  the  banks  of  the  West  have  been  compelled  to  buy 
the  circulation  of  New  England  and  New  York  and  pay  three  and  four  per  cent  for  it." 
Co7ig.  Globe,  1867-1868,  p.  3187.  In  1872  the  rate  paid  to  brokers  for  notes  of  banks 
closing  or  insolvent,  was  said  to  be  "  from  four  to  six  per  cent."  —  Finance  Report,  1872, 
p.  74. 


352  ESSAYS 

ber,  1866,  the  nine  Southern  states  on  the  coast  lost  five  of  their  forty- 
eight  banks,  and  gained  less  than  $2,000,000  in  circulation.  The  inte- 
rior group,  Kentucky,  Tennessee,  and  Arkansas,  gained  nine  banks, 
chiefly  of  small  capital  in  Tennessee,  but  with  an  increase  of  circula- 
tion of  only  $700,000.  Whether  the  South  could  otherwise  have 
availed  itself  of  the  national  system  to  any  great  extent  or  not,  it 
appeared  to  be  practically  cut  off  from  making  the  trial,  by  the 
absorption  of  the  right  of  issue  in  the  North  and  East. 

It  must  not  be  forgotten,  however,  that  even  if  the  apportion- 
ment had  been  carried  out  in  strict  compliance  with  the  terms 
of  the  law,  the  evils  complained  of  would  only  have  changed  their 
place  without  being  prevented.  The  theory  on  which  Congress 
proceeded,  of  allotting  the  right  of  issue,  in  proportion  partly 
to  population  and  partly  to  an  indefinite  basis  of  estimated  capital, 
could  never  have  distributed  the  note  issue  in  the  proportion  in 
which  it  would  have  distributed  itself  if  left  entirely  free.  Probably 
the  existing  banking  capital  and  surplus  would  have  made  a  much 
nearer  approach  to  a  natural  allotment  than  the  basis  proposed  by 
Congress,  since  it  represented  more  nearly  the  essential  needs  and 
capacities  for  banking  as  they  then  existed  in  the  several  parts 
of  the  Union.  The  allotment  of  a  limited  amount  of  circulation 
upon  the  basis  adopted  by  Congress  would  have  given  the  South 
and  West  freedom  for  bank  expansion,  which  they  might  or  might 
not  have  used,  but  would  have  compelled  a  heavy  reduction  of 
banking  facilities  in  the  Eastern  and  Middle  states,  not  only 
checking  their  natural  growth,  but  causing  a  positive  diminution 
of  existing  financial  machinery.  The  conditions  of  the  case  pre- 
sented a  dilemma,  therefore,  from  which  there  was  no  escape  so 
long  as  the  limit  upon  the  aggregate  issue  of  bank-notes  should 
remain. 

The  course  pursued  by  the  Comptroller,  as  has  been  seen,  threw 
the  pressure  of  a  limited  right  of  issue  upon  the  South  and  West. 
The  sections  thus  harshly  treated  were  not  slow  in  making  their 
complaints  heard.  Little  notice  was  taken  of  the  subject  in  the 
reports  of  the  Secretary  and  Comptroller  for  1865,  but  some  effort 
was  made  in  Congress  at  the  session  of  1 865-1 866  to  find  a  remedy. 
The  choice  lay  between  an  increase  of  the  aggregate  issue  and  the 
withdrawal  of  circulation  from  states  having  an  excess  under  the 
rule  established  by  Congress,  and  its  distribution  among  those  found 


THE   CIRCULATION   OF   THE   NATIONAL  BANKS  353 

deficient.  The  latter  expedient  met  strong  opposition  from  the 
states  which  would  have  been  drawn  upon  for  the  supply  of  the 
others  ;  and  an  increased  total  issue  was  also  opposed  as  threaten- 
ing a  multiplication  of  the  obstacles  to  early  specie  resumption. 
Congress  found  it  impossible,  either  at  that  session  or  at  several 
succeeding  sessions,  to  act  upon  a  question  thus  beset  with  dififi- 
culties.  At  the  session  of  1 867-1 868  a  bill  passed  the  Senate,^ 
withdrawing  and  redistributing  ^20,000,000  of  bank  circulation  ; 
but  the  House  at  the  next  session  substituted  for  this  plan  a  pro- 
vision for  the  allotment  of  ^150,000,000  of  circulation  according 
to  the  appraised  value  of  property  in  the  several  states,^  and  the  end 
of  the  session  found  the  two  Houses  in  hopeless  disagreement.^ 
At  the  spring  session  of  1869  the  Senate  passed  a  bill  redistribut- 
ing ^30,000,000,*  but  no  action  was  taken  upon  it  in  the  House. 

At  the  session  of  1 869-1 870  the  subject  again  came  up  and, 
after  much  debate  and  a  series  of  disagreements  between  the  two 
Houses,  a  bill  was  framed  to  reconcile  the  differing  opinions  of 
those  who  agreed  as  to  the  necessity  for  some  action  for  the  relief 
of  the  South  and  West.  Under  two  acts  passed  in  1867  and  1868 
Congress  had  authorized  an  issue  of  temporary  loan  certificates,  to 
be  used  in  redeeming  certain  legal-tender  compound-interest  notes 
issued  in  the  latter  part  of  the  war.  These  certificates,  bearing 
interest  at  three  per  cent,  by  the  terms  of  the  act  authorizing  their 
issue  could  be  held  by  banks  as  part  of  their  reserve,  and  were  still 
outstanding  to  the  amount  of  $45,500,000.  The  withdrawal  of  this 
amount  of  paper  serving  one  of  the  purposes  of  money  was  accord- 
ingly proposed  as  an  offset  for  an  increase  of  national  bank-notes, 
and  upon  this  basis  Congress  passed  the  act  of  July  12,  1870.^  This 
act  provided  that  1^54,000,000  of  bank-notes  might  be  issued  to 
banks  in  states  having  less  than  their  due  proportion  under  the 
act  of  1865,  and  that  the  three  per  cent  certificates  should  be 
called  in  and  redeemed  as  fast  as  the  bank-notes  should  be  issued. 
This  operation  completed,  a  further  amount  of  $25,000,000  was 
then  to  be  withdrawn  from  states  having  an  excess  of  bank  cir- 
culation, and  issued  to  banks  in  states  having  less  than  their  due 
proportion ;  and  provision  was  also  made  by  which,  in  addition, 

1  Cong.  Globe,  1867-1868,  p.  3222.  *  Ibid.,  1869,  p.  371. 

2  Ibid.,  1868-1869,  p.  1333.  5  16  "  Statutes  at  Large,"  p.  251. 

3  Ibid.,  p.  1897. 

2  A 


354  ESSAYS 

banking  associations  might  be  moved  from  any  state  having  an 
excess  of  bank  circulation  to  any  state  found  deficient.^  The  same 
measure  provided  for  the  estabhshment  of  gold  banks,  issuing 
notes  redeemable  in  gold  coin  upon  the  security  of  United  States 
bonds,  and  in  other  respects  carrying  on  their  business  upon  a  gold 
basis.  This  addition  to  the  national  system  was  made  in  view  of 
some  supposed  needs  in  the  Atlantic  ports  and  also  of  the  anoma- 
lous condition  of  the  Pacific  states,  where,  by  popular  will,  aided 
by  local  legislation,  the  gold  standard  had  been  retained  during  and 
after  the  war.^  It  was  in  fact  an  experiment  in  free  banking  on  the 
specie  basis.^  The  gold  notes  to  be  issued  were  not  subject  to  any 
aggregate  limit,  and  their  introduction  was  not  looked  upon  as  hav- 
ing any  relation  to  the  questions  raised  by  the  mass  of  inconvert- 
ible paper.  The  establishment  of  such  a  system  carried  with  it, 
however,  some  implication  that  the  redemption  of  the  remainder 
of  the  national  currency  in  specie  was  now  felt  to  be  too  remote 
to  be  counted  upon.  This  impression  was  confirmed  by  the  course 
of  debates  on  the  various  plans  for  a  redistribution  of  the  national 
bank  issues,  and  by  the  strength  of  the  minority  which  favored  the 
plan  of  giving  relief  to  the  South  and  West  by  some  form  of  paper 
expansion. 

There  was  no  delay  in  taking  advantage  of  the  act  of  1870. 
When  the  Comptroller  made  his  next  report,  dated  November  7, 
1870,  thirty-one  banks  had  already  been  organized  under  the  new 
law,  and  two  hundred  and  fifty  applications  were  on  file.  Many 
of  the  latter  were  believed  to  be  speculative  or  unsupported  by 
capital ;  but  it  was  clear  that  a  considerable  movement  had 
started."^  Of  the  banks  organized  twenty  were  in  the  Western 
states,  eight  in  Kentucky  and  Tennessee,  and  only  three  in  Vir- 

1  The  Senate  had  proposed  an  increase  of  $45,000,000,  and  the  House  $95,000,000. 
The  Senate  conferees  agreed  to  $54,000,000  as  the  equivalent  of  $45,000,000,  and  of  the 
reserves,  estimated  at  20  per  cent,  which  the  banks  would  have  to  keep  ;  and  this  calcu- 
lation was  accepted  on  the  part  of  the  House.  —  Cong.  Globe,  July  6,  1870,  p.  5285. 

'^  See  an  article  by  Professor  Moses,  "  Legal-tender  Notes  in  California,"  in  the 
Quarterly  yournal  of  Economics,  October,  1892. 

8  The  bill  as  passed  by  the  Senate  provided  that  the  notes  should  be  redeemed  in 
"  gold  or  silver  coin."  "  But,"  said  Mr.  Garfield,  one  of  the  conferees  on  the  part  of  the 
House,  "  we  strike  out  the  words  '  or  silver,'  so  that  there  shall  not  be  two  metals  named 
as  the  money  in  which  the  notes  shall  be  redeemed.  Silver  is  not,  under  our  laws,  a 
legal  tender  except  for  sums  of  five  dollars  or  less.  To  this  modification  the  Senate 
agreed." —  Cong.  Globe,  June  28,  1870,  p.  4949.  *  Comptroller's  Report,  1870,  p.  25. 


THE   CIRCULATION   OF  THE   NATIONAL   BANKS  355 

ginia  and  Georgia ;  but  of  the  applications  nearly  one-fourth, 
representing  one-third  of  the  capital  called  for,  were  from  the 
Southern  coast  states.  The  movement  thus  begun  went  on,  until 
at  the  close  of  1873  Mr.  John  Jay  Knox,  who  had  then  become 
Comptroller  of  the  Currency,  reported  that  all  but  a  small  fraction 
of  the  additional  $54,000,000  had  been  issued  or  authorized,  and 
that  he  should  next  proceed  to  the  withdrawal  of  $25,000,000  of 
circulation  from  the  banks  of  Massachusetts,  the  city  of  New 
York,  the  city  of  Providence,  and  Connecticut,  and  its  allotment 
among  banks  in  states  having  a  deficiency.  This  allotment  it  was 
necessary  to  make,  under  the  terms  of  the  act  of  1870,  on  the  basis 
afforded  by  the  census  of  that  year,  and  the  Comptroller  had  already 
given  a  table  in  his  report  for  1872,  showing  the  circulation  then 
actually  authorized  and  the  allotment  of  $354,000,000  which  would 
be  required  under  the  law  of  1865.^  This  table  and  the  returns  for 
1870  and  1873  enable  us  to  make  the  following  comparison  :  — 

Of  states  having  an  excess  in  1866: 

Six  New  England  . 

Five  Middle    .... 

Ohio,  Indiana,  Minnesota 
Of  states  deficient  in  1866: 

Six  Western   .... 

Kentucky,  Tennessee,  Arkansas 

Nine  Southern,  Atlantic,  and  Gulf  .        6.1  16.6  47.8 

These  figures  show  plainly  the  strength  of  the  demand  for 
banking  facilities  in  the  deficient  sections.  They  also  show  the 
singular  crudity  of  the  expedients  by  which  Congress  had  under- 
taken the  apportionment  of  bank  circulation.  Upon  a  mixed 
basis  of  population  and  resources  the  West,  even  with  the  relief 
afforded  by  a  fresh  allotment  under  the  new  census,  was  sure  to 
find  its  proportion  under  the  law  too  narrow  for  it ;  and  the  South 
was  as  certain  to  find  it  impossible  to  use  its  quota,  even  when 

^  The  acts  of  1863  and  1865  called  in  identical  words  for  the  apportionment  of  half 
of  the  issue,  "  having  due  regard  to  the  existing  banking  capital,  resources,  and  business  " 
of  the  states.  In  1872  Mr.  Knox,  after  consultation  with  the  Secretary  of  the  Treasury, 
contented  himself  with  using  the  reported  valuations  of  the  states  found  in  the  census,  in 
satisfaction  of  the  above  requirements.  See  Finance  Report,  1872,  p.  72.  In  1865 
Secretary  McCuUoch  made  an  allotment  which  is  not  to  be  reconciled  with  the  valua- 
tion of  i860. 


Circulation 

Circulation 

Circulation 

October  i,  1870 

November  i, 

1873 

if  Apportioned 

.      104.5 

no. 5 

39-8 

.      125.4 

124.6 

115. 2 

•      31- 

41.9 

43-9 

•      24.7 

42.5 

43-9 

4.1 

II. 2 

21.5 

356  ESSAYS 

reduced  in  accordance  with  the  diminished  importance  of  those 
states.  It  is  easier,  however,  to  see  the  defects  of  the  method 
adopted  than  to  imagine  a  substitute  which  would  have  made  any- 
satisfactory  allotment  of  a  limited  right  of  issue.  As  regards  the 
mere  use  of  the  bank-notes  as  currency,  they  flowed  like  the  legal- 
tender  notes  with  the  current  of  mercantile  payments,  and  the  place 
of  issue  was  as  little  important  in  the  one  case  as  in  the  other. 
Once  in  circulation,  a  bank-note  passed  from  hand  to  hand  without 
inquiry  as  to  the  particular  bank  from  which  it  was  issued.  Its 
source  was  easily  seen,  but  in  the  absence  of  any  effective  redemp- 
tion there  was  no  motive  for  returning  it  thither,  and  so  it  passed 
as  an  undistinguished  drop  in  the  ocean  of  paper  currency.  As 
early  as  1868  the  Comptroller  complained  that  even  the  notes  of 
banks  in  liquidation  were  not  presented  and  that  the  owners  of 
such  banks  were  able  to  reap  all  the  benefit  of  their  circulation 
after  they  had  ceased  to  carry  on  any  real  business ;  and  it  was  to 
meet  this  evil  that  the  act  of  July  14,  1870,  was  passed,  requiring 
all  banks  in  liquidation  to  deposit  lawful  money  and  withdraw  their 
bonds  from  the  Treasury  within  a  fixed  limit  of  time.^  This  legis- 
lation hastened  the  settlement  between  the  issuing  banks  and  the 
Treasury,  but  the  notes,  whether  issued  by  active  or  by  defunct 
banks,  still  gravitated  as  slowly  as  ever  toward  the  place  of  redemp- 
tion. In  short,  the  bank-note  was  nearly  as  destitute  of  any  domi- 
cile as  coin  itself,  and  therefore  it  followed  that,  of  the  whole  mass 
of  currency  afloat  at  any  given  moment,  any  particular  state  en- 
joyed only  such  proportion  as  it  was  entitled  to  by  its  financial 
relations  with  other  states  and  sections,  as  it  might  in  the  case  of 
coin  or  of  legal-tender  notes.  The  debtor  states  were  deficient  in 
anything  that  could  serve  as  a  medium  of  payment,  and  the  creditor 
states  found  currency  abundant.  It  is  not  to  be  supposed  then  that 
the  South  or  any  part  of  the  West  really  had  less  currency  for  use 
by  reason  of  their  failure  to  obtain  their  proportion  of  the  right  of 
issue. 

Those  states  undoubtedly  suffered  from  a  lack  of  general  bank 
accommodation.  The  requirement  made  by  the  law  that  every 
national  bank,  whether  issuing  notes  or  not,  should  qualify  itself 
for  issue  by  a  deposit  of  bonds  equal  to  at  least  a  third  of  its 
capital,  was  by  itself  a  serious  drawback  for  banks  in  most  parts 

1  16  "Statutes  at  Large,"  p.  274. 


THE   CIRCULATION    OF   THE   NATIONAL   BANKS  357 

of  the  North  and  West,  for  it  diverted  an  important  fraction  of  their 
scanty  capital  from  its  primary  function  as  a  supply  of  loans  for 
the  local  demand.  For  city  banks,  deriving  any  considerable  aid 
from  deposits,  this  locking  up  of  capital  might  not  be  a  serious 
difficulty,  but  for  banks  in  sparsely  settled  districts  it  made  the 
situation  difficult.  When  failure  to  obtain  the  right  of  issue  was 
added  to  the  diversion  of  capital  from  loans  to  bonds,  the  country 
banks  found  themselves  practically  excluded  from  the  national 
banking  system  and  sometimes  from  all  banking  except  as  private 
banks.  State  banks  under  imperfect  regulation  or  private  bankers 
were  then  the  chief  resort  for  the  deficient  states  and  sections. 
Hampered  in  some  degree  these  states  and  sections  probably  would 
have  been  in  any  case,  being  poor  in  capital  and,  at  least  in  the 
South,  unable  for  a  time  from  poHtical  causes  to  secure  a  free 
supply  of  capital  from  outside;  but  their  situation,  unfavorable 
in  any  case,  was  made  far  worse  by  the  singular  manner  in  which 
the  law  had  been  made  to  operate  upon  them. 

With  the  great  financial  revulsion  of  1873  the  national  banks 
and  the  legislation  of  Congress  for  their  regulation  entered  upon 
a  new  stage  of  development.  The  complete  prostration  of  busi- 
ness from  the  latter  part  of  September,  1873,  instantly  checked 
the  establishment  of  new  banks,  so  that  a  comparison  of  the 
returns  of  September  12,  1873,  and  June  26,  1874,  shows  an 
increase  of  only  seven  banks  and  an  absolute  loss  in  both  capital 
and  circulation.  A  comparison  by  states  shows  that  the  sudden 
loss  of  inducements  for  the  investment  of  capital  in  banking  was 
universal.  To  a  large  party  in  Congress,  however,  this  continued 
depression  appeared  to  be  the  result  of  a  deficient  circulation,  and 
not  of  that  loss  of  confidence  which  must  follow  a  panic  under  any 
system  of  currency  whatever ;  and  the  assembling  of  Congress 
was  the  signal,  therefore,  for  a  multitude  of  propositions  for  the 
increase  of  paper  issues,  for  their  extension,  especially  in  the  states 
poor  in  capital,  and  for  warding  off  the  supposed  evils  of  contrac- 
tion and  approach  to  the  specie  basis.  On  the  other  hand,  the 
advocates  of  specie  payments  found  the  moment  opportune  for 
pressing  the  argument  that  the  destruction  of  credit  and  the  depres- 
sion of  prices  by  the  financial  panic  had  already  done  the  worst 
that  could  be  feared  from  contraction,  and  that  there  was  neither 
excuse  for  delaying  resumption  nor  safety  to  be  found  without  it. 


358  ESSAYS 

A  wearisome  debate  of  several  months  produced  a  bill  for  increas- 
ing the  issue  of  legal-tender  notes  and  of  bank-notes  to  $400,000,000 
each,  and  this  measure  was  vetoed  by  President  Grant,  after  some 
vacillation  which  had  nearly  caused  his  approval  of  the  measure. 
Congress,  then,  after  two  months  of  further  consideration,  passed 
a  bill  which  became  a  law  June  20,  1874,  by  which  $30,000,000  was 
added  to  the  sum  of  $25,000,000  which,  under  the  act  of  1870,  was 
to  be  withdrawn  from  banks  in  states  having  an  excess  of  bank 
currency  under  the  legal  allotment  and  distributed  in  states  found 
to  be  deficient.^  The  act  further  provided  for  discontinuing  the 
redemption  of  bank  issues  by  agents  in  the  redemption  cities,  and 
substituted  the  method  of  actual  redemption  at  the  Treasury  of 
the  United  States,  every  bank  being  required  for  that  purpose  to 
maintain  in  the  Treasury  a  deposit  of  cash  equal  to  five  per  cent 
of  its  outstanding  circulation.^  The  law  also  made  an  important 
provision  for  the  relief  of  banks  which  found  the  right  of  issue 
unimportant,  by  authorizing  any  bank,  upon  the  withdrawal  or 
reduction  of  its  circulation,  to  reduce  its  deposit  of  bonds  to  any 
amount  not  less  than  $50,000. 

Of  these  provisions  of  the  act  of  1874,  those  relating  to  treasury 
redemption  and  to  reducing  the  deposit  of  bonds  are  still  in  force 
and  have  never  ceased  to  be  regarded  as  valuable  improvements, 
defective  only  from  their  failure  to  go  far  enough.  Although  suc- 
cessive Comptrollers  have  seen  in  treasury  redemption  only  a  pro- 
vision for  securing  a  physically  clean  issue  of  notes,  it  has  been 
the  means  of  sifting  out  from  the  mass  of  notes  somewhat  more 
certainly  and  expeditiously  the  issues  of  insolvent  or  closing  banks, 
and  has  also  done  something  to  maintain  the  theory  of  a  system 
of  central  redemption,  which  a  turn  of  affairs  might  almost  any  day 
have  made  important.  The  diminution  of  the  compulsory  invest- 
ments in  United  States  bonds  was  a  step  toward  freeing  the  banks 
from  making  more  use  of  the  right  of  issue  than  their  business 
naturally  required.  Banks  of  small  capital,  required  to  invest  one- 
third  of  it  in  bonds,  were  left  under  the  necessity  of  using  the 
credit  which  so  large  an  investment  would  afford.^     Still,  the  act 

1  18  "  Statutes  at  Larj^e,"  p.  123. 

-  The  notes  ceased  to  be  subject  to  the  general  reserve  requirements  which  had 
hitherto  applied  to  them  as  well  as  to  deposits. 

^  Mr.  Knox,  the  Comptroller,  had  advised,  in  1872,  that  the  rc(]uirement  be  reduced 
to  a  deposit  of  ;?io,oop  of  bonds. 


THE   CIRCULATION   OF   THE   NATIONAL   BANKS  359 

of  1874  left  the  larger  banks,  for  whom  ^50,CK)0  invested  at  a  low- 
return  was  not  so  serious  a  matter,  more  freedom  of  action  than 
had  been  allowed  them  before,  and  so  had  some  tendency  to  dimin- 
ish issues  in  the  important  banking  centres,  and,  therefore,  to 
make  room  for  increase  of  issues  elsewhere. 

So  far  as  the  act  of  1874  provided  for  the  redistribution  of  a  part 
of  the  bank  circulation,  it  followed  the  Hne  marked  out  by  previous 
legislation,  and  endeavored  by  small  and  temporary  adjustments  to 
arrive  at  such  an  apportionment  of  a  limited  issue  as  should  satisfy 
the  most  clamorous  of  present  needs.  If  the  new  provisions 
had  been  long-lived,  the  question  of  some  fresh  adjustment  must 
have  come  before  Congress  before  long  in  the  familiar  form  of  a 
contest  between  the  thriving  younger  states  and  the  richer  banking 
communities  of  the  East;  but  happily  the  moment  was  near  when 
decisive  measures  for  the  return  to  specie  payment  destroyed  all 
anxiety  as  to  the  allotment  of  bank  issues.  In  fact,  the  stress  of 
the  times  began  to  narrow  the  field  for  circulation  even  before  the 
passage  of  the  resumption  act.  The  returns  of  the  banks  for 
October  and  December,  1874,  showed  a  loss  in  circulation  of  more 
than  $7,000,000  for  the  last  half  of  the  year.  This  was  the  net 
result  of  new  or  increased  issues  of  notes  on  the  one  hand,  and  of 
still  more  important  surrenders  of  issue  on  the  other,  irregularly 
distributed,  and  showing  important  changes  of  banking  conditions 
in  particular  states.  Down  to  November  i,  New  York  and 
Missouri  each  surrendered  more  than  $2,000,000;  Kentucky,  Indi- 
ana, and  Illinois  together  received  more  than  $2,000,000.^  The 
Comptroller  reported  at  the  beginning  of  the  session  that  the  with- 
drawals of  notes  by  some  banks  and  the  liquidation  of  others  placed 
at  his  disposal  $14,200,000  of  circulation,  probably  enabling  him 
to  satisfy  demands  from  new  banks  for  some  months  to  come.^ 

The  demand  for  the  right  of  issue  was  declining,  therefore,  when 
Congress,  by  the  resumption  act  of  January  14,  1875,^  providing  for 
a  return  to  specie  payment  in  1879,  repealed  all  provisions  of  law, 
fixing  a  limit  to  the  aggregate  of  bank  circulation,  and  thus  intro- 
duced free  banking  from  the  date  of  the  act.  The  present  narra- 
tive does  not  call  for  any  review  of  the  circumstances  under  which 
the  resumption  act  was  passed,  or  any  estimate  of  it  as  a  measure 

1  Comptroller s  Report,  1874,  p.  128.  ^  Ibid,,  p.  129. 

^  18  "Statutes  at  Large,"  p.  296. 


36o  ESSAYS 

for  carrying  out  a  great  reform.  It  succeeded,  and  by  making  the 
greenback  redeemable  in  coin  brought  the  banks  also  to  a  coin  basis 
on  the  day  appointed.  The  introduction  of  free  banking  was  an  es- 
sential part  of  the  plan  of  operations  by  which  this  was  to  be  effected. 
The  act  contemplated  the  substitution  of  national  bank-notes  for 
greenbacks  and  the  possible  reduction  of  the  latter  by  this  process 
to  ;^300,ooo,ooo,  as  a  preliminary  for  the  safe  resumption  of  pay- 
ment on  the  remainder.  The  issue  of  bank-notes  was  made  free, 
therefore,  with  the  cautious  provision  that  as  fast  as  notes  should  be 
issued  to  new  banks  or  to  banks  increasing  their  circulation,  legal- 
tender  notes  should  be  withdrawn  to  the  amount  of  eighty  per  cent 
of  the  bank-notes  thus  issued,  this  arrangement  resting  on  the 
calculation  that  an  issue  of  bank-notes  would  in  its  practical  work- 
ing imply  a  reserve  of  not  far  from  twenty  per  cent,  so  that  the 
effective  addition  to  note  circulation  by  the  banks  would  be  toler- 
ably well  offset  by  the  withdrawal  of  greenbacks,  and  no  important 
change  be  made,  therefore,  in  the  amount  of  paper  in  circulation. 

The  course  of  affairs  in  the  next  few  years  defeated  many  pre- 
dictions as  to  the  operation  of  the  resumption  act.  The  depression 
which  had  followed  the  great  revulsion  of  1873  continued  and  even 
deepened  in  the  years  from  1875  to  1878.  The  loans  of  banks 
fell  off  somewhat  in  the  general  stagnation  of  business,  and  it  was 
not  until  1879  was  well  advanced  that  the  banks  again  had  full 
employment  for  their  funds.  But  these  discouraging  conditions  did 
not  act  uniformly  upon  all  sections  nor  upon  all  localities  or  banks  in 
any  one  section.  In  some  cases  additional  banking  capital  and  cir- 
culation was  called  for,  and  in  others  banks  reduced  their  circula- 
tion as  allowed  under  the  act  of  1874,  or  even  went  into  liquidation  ; 
and  thus  the  actual  change  which  took  place  was  the  net  result  of 
two  opposing  movements.  For  the  last  half  of  1874  the  issues  of 
new  circulation  somewhat  exceeded  the  withdrawals;  but  in  1875 
the  withdrawals  exceeded  the  new  issues,  and  in  1876  the  decline 
of  bank  circulation  was  strong.  For  the  year  ending  November  i, 
1876,  with  issues  of  new  circulation  amounting  to  a  little  more 
than  $7,000,000,  the  amount  retired  under  the  act  of  1874  was  over 
$24,392,255,  the  amount  retired  by  banks  in  liquidation  was  $3,1 14- 
726,  and  $4,022,883  was  surrendered  by  banks  not  rehnquishing 
the  right  of  issue.  This  made  a  net  loss  of  circulation  of  about 
$24,000,000,  in  which  all  the  sections  and  nearly  all  the  states  par- 


THE   CIRCULATION   OF   THE   NATIONAL   BANKS  361 

ticipated,  although  in  unequal  proportion. ^  The  year  ending  No- 
vember I,  1877,  also  showed  some  excess  of  withdrawals,  although 
a  considerable  increase  was  shown  by  New  York  and  New  England. 
The  tide  turned  in  the  year  ending  November  i,  1878,  and  in  1879 
the  national  bank  circulation  had  its  part  in  the  general  activity. 
That  its  inability  to  grow  under  the  freedom  of  the  resumption  act 
was  in  part  the  result  of  general  business  conditions  is  clear  from 
the  fact  that  the  dividends  of  the  national  banks  fell  from  10.96 
per  cent  of  capital  and  surplus  in  1873  to  5.49  per  cent  in  1879  ; 
and  that  the  aggregate  surplus  of  all  the  banks  in  the  system, 
which  had  steadily  gained  until  the  middle  of  1875,  from  that 
point  fell  as  steadily  until  the  middle  of  1879,  declining  from 
^133,000,000  to  $114,000,000. 

But  besides  the  discouragement  which  the  banks  at  this  time 
felt  in  common  with  all  business  interests,  they  had  begun  to  suffer 
from  one  special  depressing  influence,  which  was  destined  to  have 
a  lasting  effect  on  their  gains  from  the  right  of  issue.  In  1870, 
of  the  bonds  deposited  by  the  banks  to  secure  their  circulation, 
nearly  three-quarters  bore  interest  at  6  per  cent  and  the  remainder 
at  5  ;  by  1876  the  refunding  of  the  former  had  gone  so  far  that 
less  than  one-third  of  the  bonds  on  deposit  were  6  per  cents ;  by 
1879  rnore  than  one-third  of  the  bonds  were  at  5  per  cent;  and 
in  1883  the  deposit  of  $348,000,000  was  made  up  of  $41,000,000 
at4|-,  $106,000,000  at  4,  and  $201,000,000  at  3.  The  circulation  of 
the  banks,  which  from  the  end  of  1879  to  the  end  of  1881  had  fluctu- 
ated between  $300,000,000  and  $325,000,000,  began  to  decHne  in 
1882  and  was  withdrawn  with  some  regularity  until  in  the  first 
half  of  1 89 1  it  stood  at  about  $123,000,000.  The  turning-point 
was  reached  when  in  the  summer  of  1891  the  price  of  the  United 
States  4  per  cents  fell  enough  to  return  to  the  purchasers  of  bonds 
nearly  3  per  cent  and  the  circulation  slowly  increased  until  in  May, 
1893,  it  had  reached  $  1 50,000,000.  During  the  summer  many  banks 
took  out  further  circulation  to  supply  the  demand  for  money  suitable 
for  everyday  use,  the  dearth  of  which  was  one  of  the  most  striking 
features  of  the  crisis  of  1893,  and  by  October  the  total  note  issue 
stood  at  $183,000,000. 

^  The  New  England  and  Middle  states  lost  in  circulation  ;?i  1,800,000;  the  Central 
states,  ^7,300,000  ;  the  South  and  Southwestern  states,  ^4,300,000.  —  Comptroller' s  Re- 
port, 1875,  p.  253,  and  1876,  p.  262. 


362  ESSAYS 

In  the  disturbed  years  which  followed  the  issue  fell  slightly, 
then  rose  to  nearly  $211,000,000  at  the  end  of  1896,  with  a  further 
increase  of  the  earning  power  of  the  investment  in  bonds,  and  dur- 
ing the  three  years  following  fluctuated  between  $191,000,000  and 
$2 1 5,000,000.^  The  experience  of  these  years  proved  that  the  expan- 
sion or  diminution  of  national  bank  currency  was  powerfully  affected 
by  an  influence  quite  distinct  from  the  need  of  bank  currency  for  use 
by  the  public.  Mr.  Chase,  when  advocating  the  adoption  of  the 
national  system,  had  foreseen  the  possibility  that  payment  of  the 
public  debt  might  compel  "  a  future  generation "  to  find  for 
the  bank-notes  some  security  other  than  United  States  bonds,^  but  it 
probably  did  not  occur  to  him  or  the  other  founders  of  the  system 
that  the  rise  of  public  credit  by  itself  might  cause  the  curtailment 
and  even  threaten  the  extinguishment  of  the  note  issue. 

The  unexpected  results  of  the  bond  requirement  were  of  course 
moderated  by  the  wise  provision  of  the  act  of  1874,  referred  to 
above,  making  $50,000  the  maximum  amount  of  bonds  which  a 
national  bank  is  compelled  to  deposit.  But  even  with  this  mate- 
rial modification  the  bond  requirement  has  been  a  serious  element 
in  determining  the  geographical  distribution  of  the  national  banks. 
The  causes  which  to  a  considerable  extent  excluded  many  states 
in  the  South  and  West  from  taking  any  important  share  in  the 
system  down  to  the  passage  of  the  resumption  act  in  1875  have 
already  been  stated.-  In  the  years  of  depression  which  followed, 
ending  with  the  actual  resumption  in  1879,  these  sections  suf- 
fered serious  losses  in  national  bank  capital  and  circulation,  los- 
ing far  more  than  their  proportion  of  the  total  diminution  in  the 
United  States.  The  great  revival  of  business  which  began  in  1879 
and  the  improved  political  and  industrial  condition  of  the  South  in- 
creased the  need  of  banking  facilities  and  made  it  easier  to  provide 
the  necessary  capital,  but  any  considerable  expansion  of  national 
banking  in  the  South  and  West,  except  in  a  few  of  the  wealthy 
and  rapidly  growing  states  of  the  Middle  West,  was  then  checked 
by  the  rising  value  of  government  securities  and  the  consequent 
low  return  afforded  by  them.  The  distribution  of  the  national 
banks  therefore  underwent  little  change.     The  system  continued 

1  See  a  table  giving  the  investment  value  of  United  States  bonds,  in  the  Report  of 
the  Complrolley  of  the  Currency,  1899,  p.  41 1. 
"^  finance  Report,  1862,  p.  20. 


THE   CIRCULATION   OF   THE   NATIONAL  BANKS  363 

to  thrive  in  the  great  belt  of  states  north  of  the  Potomac  and 
Ohio  rivers,  finding  increasing  difficulty  as  it  crossed  the  Mis- 
sissippi. The  sparsely  settled  states,  having  in  the  nature  of 
the  case  the  strongest  need  of  banks  of  issue,  still  found  them- 
selves practically  cut  off  from  the  advantage  of  the  national 
system. 

Some  relief  from  this  difficulty  might  have  been  obtained,  per- 
haps, from  the  estabhshment  of  branches  by  the  banks  of  urban 
communities,  but  this  practice  is  not  now  permitted  by  the  statutes 
of  the  United  States,^  and,  although  it  has  always  existed  in  this 
country  to  some  extent  as  in  the  days  of  the  first  and  second  banks 
of  the  United  States  and  among  state  banks  under  the  laws  of  some 
states,  there  has  been  a  strong  disinclination  to  introduce  it  in  the 
national  banking  system.  PaUiatives  have  been  discussed,  such  as 
a  diminution  of  the  minimum  capital  with  which  a  national  bank 
can  be  established,  in  order  to  bring  national  banking  within  the 
reach  of  smaller  communities,  or  the  increase  of  the  note  issue  to 
the  par  value  of  the  bonds  deposited,  instead  of  hmiting  it,  as  hereto- 
fore, to  ninety  per  cent  of  that  value  ;  but  these  measures  obviously 
do  not  go  to  the  root  of  the  evil  complained  of.  Far  more  radical 
is  the  proposed  abandonment  of  the  principle  of  a  specially 
secured  currency  and  the  substitution  of  a  prior  lien  upon 
the  general  assets  of  the  issuing  bank,  with  perhaps  a  revival  of 
the  systematic  central  redemption  of  notes,  formerly  practised  in 
some  of  the  states  and  now  in  vogue  in  Scotland  and  in  Canada. 

In  the  meanwhile,  the  states  and  sections  which  found  the 
national  bank  system  ill  adapted  by  its  requirements  to  their  con- 
dition have  sought  relief  in  many  cases  by  an  extraordinary  de- 
velopment of  banking  under  state  laws.  Banks  with  as  small  a 
capital  as  $10,000,  and  in  Kansas,  Nebraska,  and  the  Dakotas 
only  $5000,  have  organized  by  the  hundred,  having  no  power  of 
note  issue,  of  course,  and  in  many  cases  with  singular  looseness 
of  control  by  the  state  authority.  By  these  agencies  the  states  in 
question  have  secured  a  rapid  increase  of  bank  facilities,  with 
some  neglect  of  provisions  for  its  soundness.  Their  needs  of 
tangible  currency  for  use  are  necessarily  variable,  and  to  satisfy 

1  For  the  purposes  of  the  Columbian  Exposition  of  1893,  ^  special  act  of  Congress  was 
passed,  authorizing  for  two  years  the  existence  of  branch  offices  of  Chicago  banks  on  the 
exhibition  grounds.  —  27"  Statutes  at  Large,"  p.  33. 


364  ESSAYS 

them  the  movement  of  large  masses  of  government  or  bank  notes 
from  the  states  farther  east  is  annually  required.  But  the  inelastic 
quality  of  issues,  whose  volume  depends  in  great  degree  upon  the 
attractiveness  of  an  investment  in  bonds,  makes  this  annual  flow 
of  currency  a  disturbing  event  and  not  seldom  the  cause  of  seri- 
ous disturbances  in  the  money  market.  It  follows,  therefore,  that, 
while  the  national  banking  system  has  created  an  issue  of  notes 
of  undoubted  solidity,  and  of  equal  value  in  every  part  of  the 
Union,  as  the  founders  of  the  system  expected,  it  has  not  yet 
created  a  system  of  banking  adapted  to  the  wants  of  all  sections 
or  tending  to  unify  their  interests.  The  national  system  is  no 
doubt  the  foundation  on  which  any  reorganization  of  the  paper 
currency  of  the  United  States  ought  to  rest,  but  it  is  still  only 
a  foundation,  with  the  superstructure  scarcely  more  advanced 
than  it  was  a  generation  ago. 


INDEX 


Adams,  Henry,  on  character  of  Hamilton's 
reports,  74. 

Adams,  J.  Q.,  report  of,  on  weights  and  meas- 
ures, 23. 

Alabama,  direct  tax  of  1861  in,  105. 

Amsterdam,  banking  in,  132,  142,  145. 

Antwerp,  147. 

Apportionment  of  national  bank-notes,  by  the 
act  of  1863,  335 ;  repealed  1864,  340 ;  re- 
newed 1865,  346;  legal  and  actual  state 
quotas  in  1865,  347-348 ;  explanation  of 
disregard  of  law  for,  348-350;  effects  of, 
on  distribution  of  the  banks,  350-352; 
act  of  1870  for,  353;  legal  and  actual  in 
1873,  355 ;  act  of  1874  for,  358 ;  repealed 
in  1875,  359. 

Arkansas,  collection  of  direct  tax  of  1861  in, 
105  note ;  banks  unconstitutional  in,  270. 

Bagelot,  W.,  on  condition  of  economic 
thought,  40 ;  on  deposits,  175. 

Baltimore,  banks  of,  in  the  crisis  of  1857,  280, 
288  ;  in  the  crisis  of  i860,  301,  309. 

Baltimore  Plan,  nature  of,  234;  chief  defect 
of,  243. 

Banco  del  Giro,  founding  of,  156 ;  organiza- 
tion of,  157-158 ;  history  of,  159-161,  166- 
167;  effect  of  suspension  on  value  of 
currency  of,  161-165. 

Banco  di  Rialto,  establishment  of,  153 ;  func- 
tions of,  153-155 ;  close  of,  156. 

Banking,  the  facilitation  of  payments  at  first 
its  chief  function,  145-148 ;  the  use  of 
credit  the  source  of  profit  in,  183. 

Banking,  Free,  in  New  York,  270,  297,  317, 
321-322;  in  the  West,  271,  297,  310,  323- 
325 ;  list  of  states  permitting,  in  i860,  322 
note. 

Banking  in  Venice,  influence  of,  in  England, 
135-136,  140-141 ;  legendary  origin  of, 
143 ;  works  on,  144-145,  166 ;  private, 
145-153 ;  suppression  of,  153 ;  Banco  di 
Rialto,  153-155,  156;  renewal  of  private, 
155-156;  Banco  del  Giro,  155-167. 

Bank-notes,  depreciation  of,  163,  287-288 ; 
analogous  to  deposits,  173 ;  the  subject  of 
far    more    legislation,    174 ;    deposit   cur- 


rency renders,  less  important,  179-181 ; 
government  notes  not  a  substitute  for,  184 ; 
state  laws  concerning,  192.  See  Elasticity, 
and  National  Bank-notes. 

Bank  of  Commerce,  special  provision  to 
secure  adhesion  of,  to  the  national  bank- 
ing system,  341. 

Bank  of  England,  model  for  the  first  bank  of 
the  United  States,  90-93 ;  publication  of 
accounts  of,  171 ;  relation  of,  to  gold  ex- 
ports, 257;  and  the  crisis  of  1857,  277, 
279,  286 ;  analogy  between  suspension  of 
Peel's  act  and  the  use  of  clearing-house 
loan  certificates,  308. 

Bank  of  France,  and  gold  exports,  257. 

Bank  of  New  York,  constitution  of,  written 
by  Hamilton,  90  note. 

Bank  of  the  United  States,  First,  a  Northern 
measure,  17;  services  of,  18;  the  Bank  of 
England  taken  by  Hamilton  as  a  model 
for,  90-93 ;  accounts  of,  168-171 ;  notes 
and  deposits  of,  174. 

Bank  of  the  United  States,  Second,  conse- 
quences of  the  war  against,  18-19. 

Banks,  projects  for,  in  England,  1581-1678, 
135-142. 

Banks,  State,  deposits  of,  177-178  ;  attractions 
of,  compared  with  national  banks,  184 ; 
bills  for  repeal  of  tax  on  notes  of,  188  note ; 
legislation  regulating,  188-190,  192;  geo- 
graphical distribution  of,  190-191,  230- 
233 ;  growth  of,  with  small  capital,  195-197, 
235,  362 ;  repeal  of  tax  on  notes  of,  undesir- 
able, 198-206 ;  issue  of  national  currency 
by,  allowed  in  act  of  1863,  202-203,  336, 
338  ;  repealed  in  1864,  341 ;  character  and 
situation  of,  in  1857,  269-271 ;  effect  of  the 
crisis  of  1857  on,  287-288;  position  of, 
prior  to  crisis  of  i860,  296-299;  effect  of 
crisis,  309-310;  survey  of,  in  i860,  314- 
329 ;  the  government  not  concerned  with, 
after  1846,  314;  diversity  of  system,  315; 
distribution  of,  315-316;  under  special 
charter,  317;  in  New  England,  318-320; 
in  New  York,  317,  321-322;  free  banks  in 
the  West,  323-324 ;  discount  on  notes  of, 
324 ;     counterfeiting    notes    of,    324-325 ; 


365 


366 


INDEX 


banks  of  the  States,  325-329 ;  entrance  of, 
into  the  national  system  in  1863,  337 ;  in 
1864,  341 ;  enabhng  acts  for,  342-343 ;  tax 
on  notes  of,  343-344. 

Bascom,  J.,  economic  writings  of,  12. 

Bastiat,  F.,  influence  of  Carey  on,  14 ;  reason- 
ing of,  affected  by  ethical  aims,  49. 

Bigelow,  E.  B.,  on  protection,  23. 

Bonds  of  the  States,  fall  of  price  of  Southern, 
in  i860,  301 ;  losses  on  Western  bank- 
notes secured  by,  in  i860,  310;  use  of, 
as  security  by  free  banks  in  the  West,  323. 

Bonds  of  the  United  States,  requirement  of, 
burdensome  to  small  national  banks,  232- 
234,358;  sale  of,  in  1894-1896,  222;  pur- 
chase of,  by  the  treasury  in  1857,  281 ; 
price  of,  in  1857,  285;  sale  of,  in  i860, 
301;  slow  sale  of,  in  1862,334;  effect  of 
requirement  of,  from  national  banks  on 
sale  of,  335  ;  holdings  of,  by  national  and 
state  banks  in  1864,  337-338 ;  require- 
ment of,  from  national  banks  changed 
in  1864,  358 ;  relation  of  national  bank 
circulation  to  price  of,  361. 

Boston,  banks  of,  in  the  crisis  of  1857,  278, 
282,  283,  288;  in  i860,  300;  policy  of,  in 
the  crisis  of  i860,  309;  pressure  exerted 
on  county  banks,  319;  banks  of,  enter  the 
national  system,  342. 

Boutwell,  Secretary,  proposal  of,  to  retire  the 
legal  tenders,  211. 

Bowen,  F.,  economic  writings  of,  12. 

Bowery  Bank,  failure  of,  283. 

Branch  banking,  advantages  of,  196-197; 
would  improve  the  national  banking  sys- 
tem, 363. 

Breckenridge,  R.  M.,  on  Canadian  bank- 
notes, 242  notes. 

Briscoe,  J.,  142. 

Buckner,  Congressman,  on  bank-notes,  181 
note. 

Cairnes,  J.  E.,  on  economic  method,  30,  31, 

34.  35.  38.  39.  47- 

Calhoun,  J.  C,  as  an  economist,  9. 

California,  gold  of,  314. 

Canada,  redemption  of  bank-notes  in,  242; 
banks  of,  successfully  meet  the  crisis  of 
1857,  284. 

Cantillon,  R.,  cited,  164  note. 

Capital,  state  banks  in  the  West  and  South 
with  small,  191,  195,  235,  363;  reduction 
of,  required  from  national  banks  undesir- 
able, 236 ;  relation  of  foreign  investments 
of,  to  gold  movements,  253-258. 

Capitation  tax,  97. 

Carey,  H.  C,  writings  of,  14-16;  quoted,  47. 

Carlisle,  Secretary,  cited,  236  note. 

Carlyle,  Thomas,  quoted,  5. 


Carriage  tax,  case  of  Hylton  v.  United  States, 
97.  loi. 

Central  America,  loss  of  steamer,  280. 

Chamberlayne,  H.,  142. 

Chase,  Secretary,  on  the  meaning  of  direct 
taxes  in  the  Constitution,  98 ;  direct  tax  pro- 
posed by,  in  1861,  loi ;  national  banking 
proposed  by,  in  1861,  330-332 ;  renewed 
in  1862,  333-336;  carried  by  influence  of, 
335 ;  foresaw  end  of  present  system  of  note 
issue,  362. 

Chemical  Bank,  283,  308. 

Clarke,  F.,  comptroller  of  the  currency,  239 
note,  247. 

Clay,  Henry,  as  an  economist,  9. 

Clearing-house  of  New  York,  returns  of,  in 
1857,  281,  286;  established  in  1851,  322. 

Clearing-house  loan  certificates,  use  of,  in 
i860,  307-308. 

Cohn,  G.,  method  of,  42. 

Coinage,  legislation  concerning,  more  stable 
than  that  for  government  paper,  220. 

Collamer,  Senator,  on  the  direct  tax  of  1861, 
loi  note ;  proposal  by,  in  1864,  of  a  coin 
reserve  for  national  banks,  345. 

Columbian  Exposition  of  1893,  363  note. 

Colwell,  S.,  12,  16  note,  155  note. 

Competition,  disappearance  of,  under  branch 
banking  improbable,  237. 

Compound-interest,  notes  of  1864-1865,  353. 

Connecticut,  banks  of,  in  i860,  320. 

Contarini,  D.,  bank  of,  in  Venice,  1597,  155. 

Contarini,  T.,  speech  of,  on  Venetian  bank- 
ing, 144,  147-150. 

Cooke, T.,  on  the  distribution  of  banks  in  the 
West,  235-236. 

Cooper,  Thomas,  11. 

Cotton,  importance  of  American,  2,  251-252. 

Cotton  manufacture,  effect  of  the  crisis  of 
1857  on,  290. 

Counterfeiting  of  bank-notes,  324-325 ;  New 
England  Association  for  the  suppression 
of,  325- 

Courtois,  A.,  on  deposits,  176  note. 

Cradocke,  F.,  banking  projects  of,  138-140. 

Credit,  long  terms  of,  prior  to  crisis  of  1857, 
269,  291,  298. 

Creditor  countries,  power  of,  over  gold  move- 
ments, 256-258. 

Crisis  of  1857,  causes  of,  foreign  trade,  266- 
269 ;  banking  operations,  269-272 ;  rail- 
road speculation,  272;  general  economic 
conditions  prior  to,  274-276;  condition  of 
the  banks,  276-278;  outbreak  of,  279; 
mistaken  policy  of  New  York  banks, 
280-282;  suspension  of  specie  payments, 
282-284;  business  paralysis,  284-285; 
improvement  after  suspension,  285-287; 
discredit    of    Western    banks,    287-288; 


INDEX 


367 


resumption,  288-289;  effects  of  the  crisis 
on  land  and  railroad  speculation,  289 ;  on 
labor,  289-290;  recovery  from,  291-293. 

Crisis  of  i860,  conditions  prior  to,  294-299 ; 
the  political  situation,  299-300;  the  posi- 
tion of  the  banks,  300 ;  monetary  pressure 
in  October,  301 ;  Lincoln's  election  followed 
by  panic,  302 ;  course  of,  302-305 ;  relief 
measures  of  New  York  banks,  305-308 ; 
of  Boston  banks,  309;  suspension  of 
specie  payments  in  the  South  and  West, 
309-310;  specie  movement  during,  311; 
slow  recovery  from,  owing  to  non-pay- 
ment of  Southern  debts,  312-313. 

Crisis  of  1873,  20 ;  effect  of,  on  national  bank 
circulation,  317. 

Crisis  of  1893,  effect  of,  on  American  im- 
ports, 250-251 ;  effect  of,  on  national  bank 
circulation,  361. 

Currency,  U.  S.,  summary  history  of,  16-21 ; 
morbid  fear  of  contraction,  172,  219; 
profit  from  government  unimportant,  183, 
225-226;  unsteady  purpose  in  legislation 
concerning,  216-224;  elements  of,  in  1857, 
272.  See  National  Bank-notes,  Treasury 
notes,  and  U.  S.  notes. 


Daru,  P.  A.,  cited,  145,  164  note. 

Debtor  countries,  relation  of,  to  gold  move- 
ments, 253-256. 

Deductive  method  in  economics,  analysis 
of,  Mill's  use  of,  31-34;  constant  use  of, 
by  writers  of  the  historical  school,  41-44. 

Deposits,  early  use  of,  in  Venice,  149 ;  a  cur- 
rency more  important  than  bank-notes, 
173 ;  true  nature  seen  by  Hamilton  and 
Gallatin,  173-174;  explanation  of  failure 
to  recognize  their  true  nature,  174-176; 
statistics  of,  in  the  United  States,  177-179 ; 
use  of,  renders  fear  of  currency  contrac- 
tion illusory,  179 ;  payment  of  interest  on, 
276,  292. 

Dew,  T.  R.,  12. 

Direct  taxes,  ineffectiveness  of  national  in 
the  United  States,  94 ;  conception  of,  de- 
rived from  the  physiocrats,  95-97  ;  prece- 
dents for  levying  by  apportionment,  97 ; 
judicial  determination  of,  97-98,  107,  133; 
imposition  of,  in  1798,98;  in  1813,99;  in 
1815,  loo  ;  in  1861, 100;  assumption  of,  by 
the  loyal  states,  103 ;  proceeds  of,  104 ; 
collection  of,  from  the  seceded  states, 
104-105 ;  collection  of,  discontinued,  106 ; 
amount  of,  uncollected,  108 ;  collection 
of,  in  South  Carolina,  109-110;  proposed 
methods  of  refunding,  111-113;  refund- 
ing of,  114. 

Dividends  of  national  banks,  350,  361. 


Diihring,  Dr.,  quoted,  15. 

Dupont  de  Nemours  on  direct  taxes,  96. 

East  River  Bank,  failure  of,  283. 

Economic  science  in  America  to  1876,  the 
development  of  the  country  a  favorable 
field  for,  1-6 ;  writings  of  statesmen,  6-10 ; 
of  scholars,  11-16;  meagre  results  of,  16; 
political  conditions  unfavorable  to,  16-21 ; 
practical  aspect  of  American  life  unfavor- 
able to,  22-25  ;  disregard  of  teachings  of, 
25-28  ;  greater  development  and  influence 
of,  in  the  future  predicted,  28-29. 

Economics,  leading  position  of  England  in, 
I ;  held  by  Germany  in  1876,  2 ;  the  re- 
action in,  30;  analysis  of  the  deductive 
method  in,  31-34;  scope  of  the  conclu- 
sions of,  35 ;  meagre  results  of,  36 ;  direction 
of  further  progress  indicated,  38-40;  the 
inductive  or  historical  school  in,  40;  its 
methods,  41-46 ;  its  attitude  toward  the 
State,  46 ;  the  place  of  laissez  faire  in,  47  ; 
the  place  of  ethical  considerations  in,  48- 
49;  value  of  historical  movement  10,50- 
51 ;  increasing  academic  importance  of, 
52-53  ;  and  in  public  estimation,  53  ;  posi- 
tion of,  in  American  universities,  54; 
scientific  method  in  its  study,  55-56; 
special  treatment  demanded  for  subjects 
under  public  discussion,  56-59;  an  im- 
possible demand,  59-60;  the  determina- 
tion and  application  of  economic  laws, 
61-64 ;  the  proper  attitude  of  the  teacher 
of,  65-67. 

Edmunds,  Senator,  on  the  reissue  of  the  legal 
tenders,  240  note. 

Elasticity  of  bank-notes,  true  meaning  of, 
237-238  ;  absent  in  case  of  national  bank- 
notes, 240;  importance  of,  241;  redemp- 
tion the  only  means  of  securing,  242. 

Elder,  Wm.,  a  disciple  of  Carey,  16. 

Election  of  i860,  attitude  of  North  and  South 
prior  to,  299;  economic  effect  of,  300. 

Ely,  R.  T.,  quoted,  41,  45  note. 

Enabling  Acts,  for  state  banks  entering  the 
national  system,  342. 

England,  financial  experience  of,  closely  fol- 
lowed by  Hamilton,  74;  land  tax  of,  97, 
99  note ;  smoothly  working  taxation  sys- 
tem of,  118;  income  tax  of,  120  note,  121, 
126-127,  131 ;  early  banking  schemes  in, 
135-142 ;  relative  importance  of  notes  and 
deposits  in,  176;  branch  banking  in,  196 
note  ;  stable  currency  system  of,  215,  225  ; 
ability  of,  to  attract  gold,  257;  gold  im- 
ports and  exports  of  1882-1898,  260-264. 

Erie  railroad,  bankruptcy  of  in  1857,  282. 

Ethics,  relation  of,  to  economics,  48-49. 

Europe,  commercial  situation  of,  in  1857,  274. 


368 


INDEX 


Everett,  A.  H.,  economic  writings  of,  ii. 

Fairchild,  C.  S.,  on  foreign  exchange,  257  note. 
Ferrara,   P.,   investigations   of,   in    Venetian 

banking,  144;  frequent  references  to,  144- 

166. 
Florida,  collection  of  direct  tax   of  1861   in, 

105  note;  banks  unconstitutional  in,  270. 
Foodstuffs,  American  exports  of,  252 ;  Euro- 
pean demand  for,  in   1858-1859,  295;    in 

i860,  298-299. 
Foreign  exchange,  movement  of,  in  crisis  of 

1857,  274,  277,  279,  281,  284,  286;  in  crisis 

of  i860,  304,  311. 
Foreign  investments,  advantages  from,  in  the 

United  States,   253;    effect    of,   on    gold 

exports,  254-25S. 
Foreign  trade  of  the  United  States,  analysis 

of,  249-252;  from  1850  to  1857,  266-269; 

in  1857,  274-275;  from  1858  to  i860,  289, 

295-296. 
Fourth    National   Bank  of  New  York   City, 

340  note. 
France,  economic  science  in,  i ;  bankruptcy 

of,  in  1790,  74  ;  stable  currency  system  of, 

215,   225;    gold   exports   and   imports  of 

1882-1898,  260-264. 
Franklin,  Benjamin,   the   economic  writings 

of,  6-7. 

Gage,  Secretary,  on  the  monetary  system  of 
the  United  States,  257  note,  262  note. 

Gallatin,  Albert,  economic  writings  of,  9 ;  on 
the  public  debt,  79  note,  88 ;  the  direct 
tax,  99,  loi  note ;  accounts  of  the  first 
bank  of  the  United  States,  168-170 ;  recog- 
nized the  true  nature  of  deposits,  174. 

Garfield,  J.  A.,  on  the  position  of  silver  as  a 
legal  tender,  354  note. 

Geneva  award,  254  note. 

Georgia,  collection  of  the  direct  tax  of  1861  in, 
107. 

Gerbier,  B.,  banking  plan  of,  139  note. 

Germany,  economic  science  in,  2,  54;  stable 
currency  system  of,  216,  225  ;  gold  imports 
and  exports  of  1882-1898,  260-264. 

Gibbs,  G.,  cited,  73  note. 

Gold,  California,  3,  266;  unprecedented  in- 
crease of,  in  the  United  States  in  1898, 
248 ;  export  demand  for,  concentrated  on 
the  Treasury,  249 ;  advantages  of  the  U.  S. 
for  retaining,  250-253  ;  debtor  position 
of  the  U.  S.  not  a  disturbing  factor,  253- 
256 ;  comparison  with  England,  257-260 ; 
exports  and  imports  of  leading  countries 
compared,  260-264;  consumption  of,  in 
the  arts,  364  ;  amount  of,  in  the  U.  S. 
in  1899,  264-265 ;  disposition  of  holdings 
of  U.  S.  banks,  1862-1865,  344-345. 


Gold  Bill,  209. 

Gold  reserve  of  the  United  States,  borrowing 
for,  222 ;  gold  for  export  taken  from,  249. 
Grant,  President,  vetoes  inflation  bill,  212,358. 
Grist,  F.  R.,  160  note,  161  note. 
Grocer's  Bank,  failure  of,  283. 
Grosvenor,  W.  M.,  23. 

Hackett,  F.  W.,  cited,  254  note. 

Hagenbuck,  C,  bank  proposed  by,  135. 

Hamilton,  Alexander,  economic  writings  of, 
7-8 ;  congressional  request  for  report  on 
the  finances,  72 ;  previous  training  of,  73 ; 
reliance  upon  English  experience,  73-74 ; 
plan  of,  for  refunding,  75-76 ;  comparison 
with  English  precedents,  76-79;  not  a 
plan  for  a  permanent  debt,  79-81;  views 
as  to  the  benefits  of  a  public  debt,  81-82; 
sinking  fund,  proposal  of,  82-89;  early 
banking  ideas  of,  89-90,  93  note ;  plan  of, 
for  the  first  bank  of  the  United  States,  90- 
93 ;  rank  of,  as  a  financier,  93 ;  on  direct 
tax,  95  ;  true  nature  of  deposits  explained 
by,  173- 

Harrison,  President,  attitude  of,  toward  free 
silver  coinage,  221. 

Harter,  M.  D.,  currency  proposals  of,  193, 
201-203. 

Hill,  J.  A.,  cited,  125  note,  127  note,  133  note. 

Historical  school  in  economics,  methods  of, 
40-44 ;  attitude  of,  toward  State  interfer- 
ence, 45. 

Hooper,  S.,  bill  of,  for  national  banks,  332  note. 

Hulburd,  H.  R.,  comptroller  of  the  currency, 
239  note,  348  note. 

Huskisson,  cited,  83  note. 

Illinois,  banks  of,  in  i860,  302,  310,  323-324; 
proposed  State  Bank  in,  328. 

Illinois  Central  Railroad,  bankruptcy  of,  in 
1857,  282. 

Immigration  to  the  United  States,  4;  effect 
of  crisis  of  1857  on,  289. 

Impot  fonder,  97. 

Income  tax,  principle  of  sound,  117;  defects 
of,  118;  fiscal  advantages  of,  118;  of  Eng- 
land, 1x8,  120  note,  121,  126-127,  131;  o*^ 
Prussia,  120  note,  121,  127-128,  131;  of 
1864,  120,  122,  123,  125. 

Income  tax  of  1894,  explanation  of  its  enact- 
ment, 116;  a  badly  devised  measure,  117; 
inheritance  provisions  of,  120-122;  deter- 
mination of  income,  123-127  ;  assessment 
at  the  source,  128-130  ;  levied  on  past 
income,  130-132;  declared  unconstitu- 
tional, 133. 

Independent  Treasury,  necessity  for,  19;  es- 
tablishment of,  314;  national  banks  ex- 
pected to  supplement,  334. 


INDEX 


369 


Indiana,  free  banks  of,  in  i860,  323 ;  Bank  of 
the  State  of,  325 ;  State  Bank  of,  326. 

Inductive  method  in  economics,  use  of,  not 
confined  to  the  historical  school,  40-43. 

Inflation,  possibility  of,  from  deposits  as  well 
as  from  notes,  185 ;  desire  of  debtor  com- 
munities, 192-194;  does  not  provide  a 
local  currency  if  redeemable,  204-206. 

Inflation  bill  of  1874,  212,  358. 

Ingram,  J.  K.,  cited,  41  note. 

Interest  on  foreign  investments  in  the  United 
States  in  1859,  296. 

International  securities,  effect  of,  upon  gold 
exports,  255-256. 

International  trade,  advantages  of  the  United 
States  in,  249,  demand  for  imports  not 
urgent,  250-251 ;  for  exports  imperative, 
251-252;  subject  to  wide  fluctuation,  252. 

Iowa,  State  Bank  of,  327-328. 

Iron  and  steel,  effect  of  crisis  of  1857  on,  290. 

Italy,  economic  science  in,  2. 

James,  E.,  quoted,  38  note,  45  note. 

Jarvis,  E.,  23. 

Jefferson,  President,  as  an  economist,  8,  17 ; 
on  Hamilton's  public  debt  policy,  79  note, 
82  note ;  on  the  publication  of  bank  ac- 
counts, 169,  170. 

Jevons,  W.  S.,  true  nature  of  deposits  not 
seen  by,  175. 

Jordan,  C.  N.,  on  the  effect  of  the  Sherman 
act  of  1890,  262  note. 

Kansas,  state  and  national  banks  in,  191,  231, 

235- 

Kentucky,  banks  of,  maintain  specie  pay- 
ments in  1851,  283 ;  and  in  i860,  309. 

Keynes,  J.  N.,  on  the  application  of  eco- 
nomic principles,  62  note. 

King,  R.,  94  note,  97, 

Kniess,  K.,  function  of  deposits  not  per- 
ceived by,  177  note. 

Knox,  J.  J.,  168,  355,  358. 

Labor,  effect  of  the  crisis  of  1857  on,  289- 
290. 

Laissez  faire,  its  place  in  economics,  45-48. 

Lambe,  S.,  banking  projects  of,  137-138. 

Land,  public,  railroad  grants  prior  to  1837, 
272 ;  effect  of  crisis  on  sale  of,  289. 

Lattes,  E.,  investigations  of,  in  Venetian  bank- 
ing, 144 ;  frequent  references  to,  144-156. 

Laveleye,  E.,  de,  on  economic  method,  47 
note,  50. 

Lee,  Henry,  report  on  tariff  duties,  23. 

Legal    Tender    Acts,   passage    of,    208-209, 

332-334- 

See  United  States  Notes. 


Leroy-Beaulicu,  P.,  quoted,  123. 

Lewis,  M.,  banking  pamphlets  of,  140-142;  on 
banking  in  Venice,  161  note,  163,  166. 

Lincoln,  President,  economic  consequences 
of  the  election  of,  299-302. 

IJst,  F.,  14,  16  note. 

Loan  certificates  of  1867  and  1868,  353. 

Louisiana,  banks  of,  specie  reserves  of,  strong- 
est in  the  country  before  the  Civil  War, 
271,  297. 

Lyons,  fair  of,  147,  152. 


Maclay,  W.,  and  the  public  debt,  79  note. 

McCulloch,  J.  R.,  II,  34,  35,  47,  68. 

McCulloch,  Secretary,  opposed  issue  of  na- 
tional currency  by  state  banks,  203,  338; 
urged  early  resumption  in  1865,  210 ;  first 
president  of  the  Bank  of  the  State  of 
Indiana,  327 ;  disregard  of  the  law  appor- 
tioning national  bank  circulation,  347,  349, 
355  note. 

McLeod,  H.  D.,  on  banking  in  Venice,  143 
note ;  on  deposits,  173. 

Madison,  President,  as  an  economist,  8; 
vetoes  bank  bill,  18;  on  the  public  debt, 
71-72. 

Maine,  banks  of,  318. 

Malpiero,  152  note. 

Malthus,  reply  to,  by  A.  H.  Everett,  11 ;  by 
H.  C.  Carey,  15 ;  method  of,  34,  47. 

Malynes,  G.,  139,  161  and  note. 

Manhattan  Company,  320. 

Manufactures,  effect  of  crisis  of  1857  on,  290. 

Marperger,  144. 

Marshall,  A.,  on  economic  laws,  64  note. 

Massachusetts,  failure  of  tax  on  personal 
property  in,  124;  ratio  of  notes  to  deposit 
before  i860,  175 ;  forbids  banks  to  pay 
notes  of  other  banks,  242 ;  effect  of  crisis 
of  1857  on  note  circulation  of,  288 ;  re- 
quires a  specie  reserve,  292 ;  banking  sys- 
tem of,  in  i860,  318-320;  bond  invest- 
ments of  banks  in  1864,  337. 

Mercier  de  la  Riviere,  on  direct  taxes,  96. 

Michigan  Central  Railroad,  bankruptcy  of,  in 
1857,  282. 

Mill,  J.  S.,  I,  14;  economic  method  of,  31- 
34.  38,  39.  47;  quoted,  38,  53,  69,  117. 

Missouri,  state  and  national  banks  in,  191, 
231;  banks  of,  in  i860,  310,  324;  bonds 
of,  largely  held  by  Western  free  banks, 

323- 

Mithoff,  Dr.,  cited,  42  note. 

Money,  explanation  of  dearth  of,  in  the  West 
and  South,  193,  204-206,  245-246,  356; 
distribution  of,  if  redeemable,  204 ;  if  irre- 
deemable, 205. 

Morosini,  quoted,  153  note. 


370 


INDEX 


Morris,  Gouverneur,  author  of  constitutional 

provision  for  direct  taxation,  94-95. 
Morris,  Robert,  9,  89,  90. 
Moses,  B.,  cited,  354  note. 

Nasse,  E.,  cited,  147  note. 

National  banking  system,  notes  and  deposits 
under,  178-180;  note  issue  requirements 
check  growth  of,  182-185 '.  'o^^  from  insol- 
vency, 186-187,  234;  distribution  of,  190, 
230-233,  362 ;  unsuited  to  sparsely  settled 
regions,  195,  233-236,  362-363;  bond  re- 
quirement burdensome,  196,  231-233 ;  also 
capital  requirement,  196,  235 ;  branches 
the  suitable  remedy,  196,  236 ;  uniformity 
a  valuable  feature  of,  199 ;  legislation  far 
more  consistent  than  for  legal  tenders, 
224 ;  certain  changes  urged,  246-247 ; 
Chase's  proposal  in  1861,  330-333;  in 
1862,  333-335 ;  act  of  1863,  335-337 ;  few 
banks  organized,  337;  defects  of  the  act 
of  1863,  338-340;  act  of  1864,  340-341; 
rapid  conversion  of  state  banks,  341-343 ; 
accumulation  of  surplus  by  sale  of  gold, 
343-345 ;  effect  of  the  apportionment  of 
circulation  on  the  growth  of,  346-359 ;  pro- 
posed changes  in,  363-364. 

National  bank-notes,  no  double  profit  from, 
182-183 ;  restrictions  on  issue  check  growth 
of  the  system,  185,  234;  possible  changes 
considered,  185-186;  inelasticity  of,  197, 
237 ;  uniformity  of,  a  great  advantage, 
228;  issue  of,  against  assets  favored,  234; 
redemption  requirements,  238-240,  348- 
349,  358;  similar  to  government  paper, 
356;  amount  of,  in  circulation,  1874-1900, 
359-362.     See  Apportionment. 

National  gold  banks,  354. 

Nebraska,  state  and  national  banks  in,  191, 
231,  233,  235. 

New  Dry  Dock  Company,  321. 

New  England,  survey  of  banks  of,  in  i860, 
318-320. 

New  England  Association  for  the  Suppression 
of  Counterfeiting,  325. 

New  Hampshire,  banks  of,  in  i860,  318. 

Newman,  S.  P.,  12. 

New  Orleans,  banks  of,  withstand  the  crisis 
of  1857,  283;  in  the  crisis  of  i860,  297; 
suspend  in  1861,  310. 

New  York,  banks  of,  in  i860,  317,  320-322; 
bond  holdings  of,  in  1864,  338. 

New  York  City,  banks  of,  operation  of,  prior 
to  the  crisis  of  1857,  275-276;  already  the 
reserve  centre  of  the  country,  276-277 ; 
during  the  crisis  prior  to  suspension  of 
specie  payments,  278-283;  after  suspen- 
sion, 285-286;  resolve  in  1858  to  require  a 
twenty  per  cent  reserve  and  against  the 


payment  of  interest  on  deposits,  292;  in 
1860,300;  loan  certificate  device  resorted 
to,  305-308;  unfavorable  in  1864  to  the 
national  banking  system,  337 ;  enter  sys- 
tem, 341-342;  propose  in  1864  that  banks 
keep  a  coin  reserve,  344. 
Noyes,  A.  D.,  cited,  259  note. 

Ohio,  real  estate   mortgages   in,  289;    State 

Bank  of,  327. 
Ohio   Life   Insurance  and  Trust  Company, 

failure  of,  279. 
Overstone,  Lord,  quoted,  293. 

Patten,  S.  N.,  cited,  52  note. 

Patterson,  Justice,  on  the  meaning  of  direct 
taxes  in  the  Constitution,  97. 

Pennsylvania,  citizens  of,  petition  Congjress 
for  action  on  the  public  credit,  72 ;  indus- 
tries of,  depressed  after  the  crisis  of  1857, 
290;  state  election  in  i860,  300. 

Perry,  A.  L.,  economic  writings  of,  13. 

Philadelphia,  banks  of,  in  the  crisis  of  1857, 
280,  288;  in  the  crisis  of  i860,  300,  309; 
beginning  of  national  banking  in,  337,  341. 

Phillips,  Willard,  as  an  economist,  7,  11. 

Physiocrats,  relation  of,  to  direct  taxation  in 
the  Constitution,  95-96. 

Pinckney,  C.  C,  94  note. 

Pitt,  William  (the  younger) ,  tontine  measures 
of,  78 ;  sinking  fund  arrangements  of,  83- 
86. 

Pollock  V.  Farmers'  Loan  and  Trust  Com- 
pany, 133  note. 

Porter,  A.  G.,  109  note. 

Potter,  A.,  12. 

Potter,  W.,  banking  project  of,  136. 

Price,  F.  G.  H.,  cited,  135,  136. 

Price,  R.,  work  of,  on  sinking  funds,  83. 

Private  banks,  deposits  of  1878-1882,  177-178. 

Prussia,  income  tax  of,  120  note,  121, 127-128, 

131- 

Public  debt  of  the  United  States,  funding  of, 
by  Hamilton,  75-79;  sinking  fund  for, 
82-89. 

Quesnay,  F.,  on  direct  taxes,  96. 

Rae,  John,  12. 

Railroads,  speculative  construction  of,  prior 
to  the  crisis  of  1857,  272;  effect  of  the 
crisis  on,  282,  289. 

Raymond,  D.,  economic  writings  of,  11. 

Reading  Railroad,  bankruptcy  of,  in  1857, 
282. 

Redemption  of  bank-notes,  sole  means  of 
securing  elasticity,  237 ;  imperfect  under 
the  national  banking  law,  238-240;  ad- 
vantages  of,  240-242;    methods    for    se- 


INDEX 


371 


curing,  243-244;  equity  of,  244-245;  the 
Suffolk  system,  319;  in  New  York  and 
Philadelphia  in  i860,  322  and  note ;  pro- 
vision for,  in  the  national  banking  law 
of  1863,  335  ;  of  1864,  340  ;  of  1874,  358. 

Reichbank  and  gold  exports,  257. 

Republican  Convention  of  1868,  opposes  re- 
pudiation, 211. 

Reserves  of  other  banks  largely  held  in  New 
York  in  1857,  276 ;  of  banks  in  1859, 
297 ;  requirement  for  national  bank  notes 
changed  in  1874,  358. 

Resources  of  the  United  States  in  1876,  2-4. 

Resumption  act,  exact  meaning  of,  purposely 
left  uncertain,  172,  212-213  >  removed  limit 
on  total  circulation  of  the  national  banks, 

359- 

Resumption,  see  Specie  payments. 

Rezasco,  cited,  156  note,  157  note,  159. 

Rhode  Island,  cotton  manufactures  of,  de- 
pressed after  the  crisis  of  1857,  290;  banks 
of,  in  i860,  318. 

Ricardo  D.,  American  edition  of,  11 ;  theories 
of,  disputed  by  Carey,  14;  economic 
method  of,  34,  39,  68-70 ;  on  Pitt's  sinking 
fund,  84  note. 

Richardson,  Secretary,  reissue  of  legal  tenders 
in  1873  by,  212. 

Roberts,  L.,  cited,  139. 

Robinson,  H.,  cited,  139. 

Rogers,  Thorold,  investigations  of,  44. 

Roscher,  William,  cited,  16 ;  method  of,  42, 44. 

Rota,  cited,  158  note,  164  note. 

Royall,  W.  L.,  quoted,  245  note. 


Savary,  cited,  144  note. 

Schmoller,  G.,  method  of,  41,  44. 

Schoenberg,  Dr.,  45  note. 

Scotland,  branch  banking  in,  196  note. 

Seligman,  E.  R.  A.,  quoted,  40. 

Senior,  N.  W.,  economic  method  of,  34,  35, 

47.  49- 

Sherbrooke,  Lord,  quoted,  37. 

Sherman,  Senator,  on  the  direct  tax,  114  note ; 
on  resumption,  172 ;  on  legal  tender  notes, 
209,  211,  212,  240,  241 ;  on  national  bank- 
notes, 238,  347,351- 

Shipping  of  the  United  States,  1850-1857,  228. 

Silver  Coinage  Act  of  1853,  270. 

Silver  Purchase  Act  of  1890,  passage  of,  214 ; 
repeal  of,  215  ;  explanations  of  its  passage, 
221 ;  consequences  of,  262. 

Sinking  fund,  Hamilton's  opinion  as  to  the 
importance  of,  80-82;  of  1862,  81  note; 
proposal  of,  for  the  Confederation,  82  note ; 
of  the  younger  Pitt,  83-84 ;  Ricardo's  criti- 
cism, 84  note;  Hamilton's  proposals,  85; 
commissioners  for,  85  note ;  of  1790,  85 ; 


of  1792,  86;  of  1795, 87;  of  1802,  88  ;  views 
of  Hamilton  and  Pitt  sound,  88-89. 

Smith,  Adam,  influence  of,  on  Franklin,  7; 
on  Hamilton,  8;  on  the  method  and 
limitations  of  economics,  34,  35,  37, 47,  62 ; 
taxation  terms  used  by,  95. 

Smith,  E.  P.,  16. 

Soresina,  A.,  on  Venetian  banking,  166. 

South  Carolina,  collection  of  direct  tax  in, 
105  note,  109-iro;  refunding  of,  in,  114. 

South  The,  national  and  state  banks  in,  230- 
233  ;  national  system  unsuited  to  needs  of, 
233-236,  362-363 ;  explanation  of  dearth 
of  currency  in,  245-246 ;  use  of  credit  in, 
prior  to  1857,  269 ;  rapid  recovery  of,  from 
the  crisis  of  1857,  291,  294;  during  the 
campaign  of  i860,  299;  Northern  loss  on 
debts  of,  in  1861,  303,  312;  apportionment 
of  circulation  in  1865,  347-348 ;  checks 
growth  of  national  banks  in,  351,  354-355. 

Spaulding,  E.  G.,  national  bank  bill  of,  332 
note. 

Specie,  natural  effect  of  exports  of,  thwarted 
under  our  currency  system,  240-241; 
movement  of,  during  the  crisis  of  1857, 
277,  279,  286 ;  during  the  crisis  of  i860 ; 
302,  304,  311;  held  by  the  banks,  1863- 
1868,  344-345- 

Specie  payments,  suspension  of,  in  1857,  280- 
284;  resumption  of,  288;  suspension  in 
1860,309-310;  in  1861,  331;  proposal  in 
1864  that  banks  prepare  for  resumption, 
344;  public  opinion  in  1865  favorable  to, 
348  ;  resumption  in  1879,  359. 

Springer  v.  United  States,  98. 

Stanhope,  Lord,  84  note. 

Stevens,  T.,  quoted,  loi  note. 

Suffolk  bank  system,  the,  319. 

Sugar,  291 ;  speculation  of  1857  in,  275. 

Surplus  of  national  banks,  required  by  act  of 
1864,  339,  340 ;  from  the  sale  of  gold,  344- 
345;  amount  of,  350,  361. 

Taille  reelle,  97. 

Tariff,  varying  policy  as  to,  26;  demand  for 
unscientific  teaching  of,  157;  of  iBgo,  and 
the  Silver  Purchase  Act,  221 ;  ad  valorem 
system  of  1846,  268. 

Taxation,of  personal  property  ineffective,  124; 
of  state  bank-notes,  343.  See  Direct  Tax 
and  Income  Tax. 

Teller,  Senator,  on  the  Silver  Purchase  Act  of 
1890,  221. 

Tennessee,  collection  of  direct  tax  in,  105 
note. 

Texas,  number  and  bond-holdings  of  national 
banks  in,  230-233 ;  state  banks  unconstitu- 
tional in,  232,  270. 

Thompson,  R.  E.,  16. 


372 


INDEX 


Tobacco,  3,  291. 

Tontine  measures  of  Hamilton  and  Pitt,  78. 

Tooke,  T.,  on  bank  accounts,  171. 

Treasur)'  of  the  United  States,  purchases  bonds 
during  the  crisis  of  1857,  281,  285.  See 
Independent  Treasury. 

Treasury,  Secretary  of,  early  position  of,  71 ; 
decline  of  influence  of,  216. 

Treasury  notes  of  1890.  See  Silver  Purchase 
Act. 

Trenholm,  W.  L.,  180,  184. 

Trevisan,  B.,  157  note. 

Trust  companies,  deposits  of,  177-178 ;  de- 
velopment of,  after  the  Civil  War,  350. 

Tucker,  G.,  12. 

Turbolo,  161  and  notes. 

Ttirgot,  A.  R.  J.,  on  direct  taxes,  96. 


Unites  States  v.  Louisiana,  107. 

United  States,  development  of  its  resources 
to  1876,  2-4 ;  economic  writings  of  states- 
men, 6-10;  of  scholars,  10-16;  summary 
of  currency  history  of,  16-21 ;  slight  in- 
fluence of  economic  science  in,  21-29; 
popular  dread  of  contraction  in,  172 ;  cur- 
rency history  of  1862-1894,  208-215;  ad- 
vantages of,  in  foreign  trade,  249-253 ; 
financial  relations  with  other  countries, 
253-256 ;  in  comparison  with  England  as 
to  ability  to  attract  gold,  256-260 ;  gold 
imports  and  exports  of  1882-1898,  260- 
264;  foreign  trade  of  1850-1857,  66-69. 

United  States  notes,  acts  for,  208,  330,  332- 
334;  depreciation  of,  209;  pardal  retire- 
ment of,  210;  reissue  of,  211 ;  retirement 
under  the  Resumption  Act,  212;  retire- 
ment discontinued,  213,360;  gold  reserve 
for,  214. 


Veazie  Bank  v.  Fenno,  98. 

Vendramin,  G.,  and  the  Banco  del  Giro,  156- 

157- 
Venice,  see  Bank  of  Venice. 
Vermont,  banks  of,  in  i860,  318,  320. 
Vethake,  H.,  economic  writings  of,  12. 
Virginia,  collection  of  direct  tax  in,  105  note. 

Wagner,  A.,  on  economic  method,  42,  on 
deposits,  177  note. 

Walker,  Amasa,  economic  writings  of,  p.  13. 

Walker,  F.  A.,  23,  42  note. 

Wayland,  President,  economic  WTitings  of,  12. 

Wealth,  relation  of,  its  growth  to  general  prog- 
ress, 5. 

Webster,  Daniel,  7 ;  as  an  economist,  9 ;  on 
banks,  18,  314. 

Wells,  D.  H.,  23. 

West  The,  national  and  state  banks  in,  230- 
333 ;  national  system  unsuited  to,  233-336, 
362-363 ;  explanation  of  dearth  of  currency 
in,  245-246;  speculation  in  prior  to  the 
crisis  of  1857,  269,271-273;  effect  of  crisis 
on,  287;  slow  recovery  of,  291,  295,  298- 
299;  currency  of,  in  i860,  302;  effect  of 
crisis  of  i860  on  banks  of,  310 :  banking 
system  in  i860,  323-329;  extension  of 
national  system  checked  in  1865,  350. 

Whigs,  theory  of,  as  to  the  currency,  314. 

White,  H.,  cited,  234  note. 

Wilson,  James,  and  the  direct  tax  in  the  Con- 
stitution, 95,  96,  97. 

Wisconsin,  banks  of  in  1S60,  302,  312,  323; 
bank-notes  of,  324. 

Wolcott,  O.,  on  the  public  debt,  73  note ;  on 
the  sinking  fund,  87 ;  on  direct  taxes,  98, 
99. 

Yates,  Governor,  310. 


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